Blocks market hopes to remain pre-eminent ECM business
IPO, rights issue and equity-linked volume were all down in 2015, so the fact that block trades maintained their 2014 level of issuance made them the stand-out business of the year in equity capital markets. Now stocks participants are asking themselves if they can keep up the pace. Olivier Holmey reports.
With 355 accelerated bookbuilds totalling more than $100bn priced by mid-November 2015, blocks bankers had much to celebrate going into year end.
They’re also predicting 2016 will be just as successful.
“We think volume will continue to remain robust this year,” says Tom Swerling, head of cross holding origination at Barclays in London. “Ultimately, equity prices, while they have been volatile, have still remained reasonably elevated. If you look at them on a long term basis, there are still a lot of stocks that are trading close to all-time highs.” That should encourage stakeholders to sells blocks
One of the key trends that could bolster the market even further in 2016 is the trend for big deals. Dan Martin, head of European equity syndicate at Goldman Sachs in London, says deals are getting increasingly large in size, and that even those that seem small often represent a large number of days of trading.
Speeding up the exit process
In March last year, for instance, Airbus sold a €1.03bn ($1.09bn) block of shares in Dassault Aviation that represented about 1,000 days of trading in the stock.
And in November, a much smaller block for Shawbrook Bank of just £84m ($127m), still represented about 200 days of trading.
Martin says: “Five to 10 years ago an issuer considering selling 30% of the company, representing six months or more of trading, would have likely announced a deal, gone on a roadshow and executed a marketed offering.
“If an owner sold 30%-40% of a company at the IPO, historically it may have taken three or four blocks to sell the remaining 60%-70%. Now, a decent size first block, perhaps increased in size during bookbuild, and then another large clean-up transaction, means it is possible to exit in 12 months instead of taking two years or more.”
This change explains how the accelerated market was able to bring the largest European ECM deal of 2015 — Santander’s €7.5bn capital raise. On a global basis, the deal was second only in size to Japan Post’s triple IPO totalling $12bn.
“Even for the very largest deals, one can think outside of what is ordinarily possible, if you back your judgment in the prevailing market conditions,” Martin says. “Santander was part of that trend, but was a standout given the size of the offering.”
That suggests more jumbo blocks could come, if the conditions are right. As blocks bankers become more confident, the need for a fully-marketed deal will increasingly fall away.
But which parts of the market will actually bring these deals?
“Markets are likely to remain volatile in the first half of 2016, but there are a number of factors that are likely to support monetisation in block activity,” says Swerling.
He identifies three main sources of issuance in 2016: government sell-downs, jumbo mergers and acquisitions, and the expiry of lock-ups from last year’s listings.
“Across Europe there are still a lot of government assets that need to be sold,” he says. The Belgian government still has a very large stake in BNP Paribas, for example, as does KfW in Deutsche Telekom and Deutsche Post.
“Whenever you have jumbo M&A activity," adds Swerling, “particularly if there is an equity component, that will often create new cross-shareholdings that will need to be unwound at some point. And we’ve had a reasonably active IPO calendar, so when lock-ups come off on 2015 deals, there are likely to be sell-downs by sponsors.”
Matthew Doughty, an equity capital markets partner at law firm Squire Patton Boggs in London, agrees: “We’ve seen a lot of high quality PE-owned companies float since 2013, and it is still a large component of the market. Sponsors are very interested in the IPO exit option.
“You’d expect a number of private equity-owned companies to bring big blocks as lock-ups expire.”
Among them are stocks such as UK share registrar and pension administration group Equiniti and, on a larger scale, payment processing firm Worldpay. Both were virtually fully owned by private equity firms before their IPOs — Advent International in the case of Equiniti and Advent and Bain Capital in the case of Worldpay. The private equity funds retain large stakes in both businesses and may look to sell down in 2016.
One area that could see a particularly high level of block activity is the consumer sector, market participants think. They point to companies such as SABMiller, British American Tobacco and Heineken as examples of stocks pushing all-time highs.
Another is telecoms, where “a strong rebound”, as Swerling puts it, and the promise of consolidation, could bring deals.
Competition could cause problems
It is not all rosy in the blocks space, however. While the blocks market fared better than IPOs as market conditions worsened in the second half of the year, participants found the going hard at times, and are worried this may still be the case in 2016.
“It was a tricky year for hedge funds,” says Jasper Tans, co-head of European ECM and corporate solutions at UBS. “Amid heightened volatility, discounts have widened on deals compared with a few months ago.”
Off the record, blocks bankers also say the highly competitive nature of their market could lead to problems in 2016.
“There’ll be a question for all of us next year around risk and capital,” one senior ECM banker says. “A lot of these trades are really just league table trades, where people are putting up risk and balance sheet with very little expectation of making any money.”
Forward looking market participants say two political events in late 2016 could also disrupt market activity.
One is the UK referendum on whether to stay in or leave the European Union, which is scheduled to take place before the end of 2017 but is widely expected to be held in October this year. For London deals, the lead-up to the vote, and its immediate aftermath if the Brexit camp wins, could be extremely damaging.
“It could be a problem, it could curtail the market,” says Doughty. “It will create a very small window for the second half of the year, which could have an incidence on the statistics then.”
The following month, on November 8, voters in the United States will be casting their ballots to elect the country’s 45th president. Late last year, the race was wide open, and market participants were already expressing concerns at some potential outcomes of the election (particularly a Donald Trump victory).
That may encourage sellers to speed up their arrival in the market, and get in before any disruptions. Bankers, in any case, are working hard to get deals ready in early 2016.
But one feature of the market blocks sellers will no doubt find reassuring is the number of investors that still trust equities to provide returns. Javier Martinez-Piqueras, co-head of European ECM and corporate solutions at UBS, says: “In terms of asset location, equities versus credit versus fixed income, the proportion allocated to equities has gone up in the past 18 months.”