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UK ECM issuance revs up as Boris rejoices

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By Aidan Gregory, Sam Kerr
13 Dec 2019

There were audible sighs of relief on equity capital markets desks on Friday morning as Boris Johnson delivered a hefty Conservative majority in the UK general election. Bankers are now prepping for a busy 2020 and a solid UK issuance calendar. A state block trade of Royal Bank of Scotland shares is among the most anticipated chunks of business for next year.

"I think this is in line with what markets wanted and a majority removes any uncertainty. People can now assume that Brexit gets done, which is good and we can now all move forward,” said a senior ECM banker at a large US bank in London. “No one wanted more uncertainty or a hung Parliament — this is a great result."

UK stocks soared as the Conservatives solidified an 80 seat majority. The benchmark FTSE 100 index had risen by 5% before 10am and the UK-focused FTSE 250 by 4.3%.

Domestically active companies were the best performers of the morning. At about 10am on Friday UK homebuilders Taylor Wimpey, Berkeley Group and Barratt Development were trading at about 15%, 12.3% and 12% up, respectively.

For equity investors the result not only allows the UK to move forward on Brexit but also confirms that Labour’s Jeremy Corbyn will not be entering Downing Street — an outcome that some sources likened to "Armageddon".

“I'm just relieved this morning," said an ECM investor at a hedge fund in London. "I think Corbyn has finally been exorcised from people's minds. 

“We are going over all of the UK homebuilders this morning, as well as challenger banks and other property companies,” he added. “We have been underweight these names for quite a considerable time, but know them well and have been waiting for an event to come back in.”

He added that if banks were to bring block trades from UK homebuilders to market in January, investors would react positively and buy them in size.

Getting ECM done

ECM volume from UK issuers is down 23.3% year-to-date, mainly because of a 61% decline in UK domestic IPO issuance.

ECM investors are hoping growing confidence among UK issuers over the country’s future will feed through to new listings on the London Stock Exchange.

“People have continued to back primary equity issuance financing M&A, right though the last year of non-performance in UK ECM, and that will continue to work next year,” said the investor. “Block trades have been easier than IPOs throughout the year as well. That will continue to work on the right day. The big change is that now there is strong potential for someone to bring a big UK IPO.”

UK origination bankers were largely buoyant on Friday morning. But they warned that it would take time for positive sentiment to feed through to UK IPOs.

“I am not sure you will meet any investment banker, particularly an ECM banker, who likes uncertainty,” said the head of UK ECM origination at a US bank. Putting aside any political allegiances, a clear path to UK certainty is a good outcome. 

"However," he added. "it takes a while for an IPO to come through. Equity and credit markets move quickly but IPO issuance is more likely in the second half. Once Brexit is worked through and UK stocks rise even higher, I think there will be a number of private equity companies who will look at their UK assets, higher valuations, and potentially do IPOs off the back of that.”

Now that the uncertainty about a Labour government and whether Brexit will happen has been removed, there is optimism that next year could be more normal for UK ECM. That should mean a solid flow of deals, including IPOs. UK equities have been enjoying consistent inflows for the first time for years.

“We expect 2020 will be a materially better year for equity issuance, which is what we are all hoping,” said a senior UK corporate broker. “We will see plenty of inward investment as well if it looks like there will be a clean Brexit.

“Markets hate uncertainty and we are getting a clearer picture now,” he added. “The fear of a hung Parliament and all the mess that brings has gone and there is a clear mandate for Brexit.”

Several banking sources said optimism had not been confined to UK investors this morning. A number of US firms had taken large positions in UK equities throughout the last few weeks.

According to data from Bank of America and EPFR Global, the UK had enjoyed eight weeks of continuous inflows before the week of the election. Sources say they expect this momentum to continue through to 2020, with more global funds allocating to UK equities.

Way clear for RBS sales

Alongside trades in UK-focused stocks, the election result is also likely to give a green light for the UK government to resume the privatisation of RBS, which is still more than 60% owned by the state after it was nationalised in 2008-9.

UK banking stocks have been some of the best performers in the wake of the vote. RBS, Barclays and Lloyds all leapt on Friday morning, while Virgin Money led the pack with an 18% gain.

Shares in RBS were trading at 257.5p at 9.59am in London, up 10.8% from the previous close.

The bank had already tracked upwards in the run-up to the vote and has now gained more than 17% over the past three months. RBS is still about 5% below the 271p offer price at which the UK government last sold its stock in June 2018.

That is a faily small valuation gap that could close soon.

“RBS is up double digits,” said Colin Jackson, an analyst at Goodbody in Dublin. “The election removes the fears of nationalisation under Labour and it allows the UK government to continue selling down RBS over the next four years.”

ECM is pretty much closed for the year now. But next week could bring some opportunistic block trades.

However, the UK government is likely to hit the ground running on further RBS sales in the New Year, once the market reopens.

“It brings the question back up again, although it is unlikely to happen before we get further clarification on Brexit in the first quarter of next year,” said Jackson. “We are hearing that the first half of next year will be busy and there could be a decent chunk of RBS coming from the UK government. They have previously committed to selling down by 2023. So the significant majority gives them credence to get started again on that, and there is a good window after they pass a Brexit deal in the New Year.”

By Aidan Gregory, Sam Kerr
13 Dec 2019