Credit market nervousness has spilled over to the equity markets, making it a lot harder for some companies to achieve the valuations they want at IPOs but benefiting convertibles issuance and other quick-to-market opportunistic deals.
"We are seeing a distinct lull in IPOs as companies with less-compelling investment cases find it more attractive to delay pricing than risk poor valuations," says Viswas Raghavan, head of international capital markets at JPMorgan in London. "There is still plenty of money out there for must-have deals but it is getting harder to attract investors to roadshows for more marginal stories unless you’re giving it away. A lot of investors have had poor returns from IPOs so far this year and are now being more selective and more sensitive to valuations."
Equity market volatility has, by contrast, been a benefit to the convertibles market. After a painfully slow summer, the EMEA convertibles market woke up to more than €1 billion-worth of issuance in one week in November. Austrian property developer Immofinanz, which returned to the market for the second time this year with a €750 million 10-year deal, and British satellite telecommunications company Inmarsat, which launched a $288 million deal, were two of the more notable issues.
"The minute spreads get ugly and volatility begins to rise, people start to look again at the convertible market because it offers them funding that’s cheaper than debt," says Raghavan. "With volatility shooting through the roof, issuers can get great valuations on their options and very attractive premiums. Investors love it too because they are very defensive, offering principal protection and repayment at maturity if the bond doesn’t convert."
Block-trade timing
According to Raghavan, volatility in the equity market also means that vendors and issuers planning on block trades need to time their deals carefully. "Right now the market changes so much from Monday to Friday, issuers and vendors really need to think opportunistically and be ready to take their money when conditions are right," he says.
In November, L’Oréal took advantage of a stable window to sell €1.5 billion-worth of Sanofi-Aventis shares, 1.7% of the company, reducing its holding to 8.7%. Bankers expect more deals like that before the end of the year.