In the first half of 2004, as bond investors worried about rising interest rates and borrowers congratulated themselves on pre-funding at low absolute rates and spreads in 2003, global debt capital markets volumes fell 11% from first-half 2003 levels. Banks? revenues from the business fell by 10% to $8 billion from $8.9 billion, according to Dealogic.
And this might just be the start.
Of course, banks knew this wretched day would come. But they have hoped all along that revenue from reviving equity capital markets and M&A business would meet the shortfall when the debt bonanza ended.
Will it?
The good news is that first-half global ECM volume and revenue were up nearly 60% on the same period last year, according to Dealogic. But remember that the first half of last year was particularly bad and this does not tell us much about what we can expect in the second half of 2004.
The more worrying news is that global ECM volume and revenues have suffered their second successive quarter-on-quarter decline. Second-quarter ECM volume this year is 30% less than it was in the fourth quarter of 2003, when it reached $162 billion, and when secondary markets were rising.
Traditionally, the second quarter of the year has been the busiest for new equity raising.
IPO volumes rose back to reasonable levels in the fourth quarter of 2003 but have been in moderate decline ever since. The success of IPOs, too, has been mixed at best. In Europe, about 40% of IPOs over e100 million marketed since the start of this year are now trading below their issue price. A large proportion of IPOs have also priced at or below their mid range.
In the US, the Bloomberg market-cap-weighted IPO index, which measures the performance of US IPOs since their initial listing, is up an unexciting 3.6% for the past six months but down 0.2% for the past month.
In Europe, especially, vendors and investors are finding it tough to agree on price. Finding the right price is of course the bookrunner?s job. But there is something about this crop of IPOs and those in the pipeline that makes that job much harder than usual: the vast majority come from private-equity, state, or corporate vendors.
IPOs in which vendors are determined to maximize their revenue from the sale are very different to equity offerings from private companies seeking to entice new shareholders so they can increase their capital and fund further growth.
The Deutsche Postbank IPO is the most graphic example. In arguably the worst IPO of recent times, investors balked at the price the vendor was asking. Even the joint bookrunner, Deutsche Bank, which considered its own bid for the business, did not believe that Postbank was an attractive investment at the initial price level. In the end, Postbank made its public debut only after the price range was cut by 10%. The sale was also cut back by a third and restructured to include an exchangeable.
Price tension in today?s IPO market is largely absent. In the IPO boom, investors were desperate to buy their way into a rising market. The situation at the moment is one where vendors are hawking companies like trinkets on a third world beach for cash to go in their pockets, not into the business, and where investors, who are under little pressure to buy primary market deals, are haggling for a low price.
With the S&P500 and the FTSE 100 flat for this year, investors want a decent discount from new issues to compensate for the risk of buying unfamiliar companies.
The global ECM backlog is at its highest level on record, according to Dealogic, with IPOs accounting for a large proportion. If banks want to realize the earnings from executing these deals they must redouble their efforts to find better ways to price transactions, perhaps by running auctions for potential bookrunners, as DrKW is doing with Pages Jaunes, or perhaps by trying to reach out more directly to retail investors as Google is trying to. Otherwise the deal backlog might stay exactly that.