Corporate Financing Analysis - European ECM Activity: The Calm Before The (Next) Storm - 13 MAR 2017

With a year of geopolitical shocks now behind us, the European equity capital markets (ecm) arena is 'back to business' and listing activity has come out of the blocks fast this year, fuelled by a bull equities market being met by the unleashing of pent-up demand for stocks. According to Dealogic data correct to February 9, as many as 100 floats have priced across European exchanges. The largest deal to have been recorded so far this year was the USD1.4bn rights issue completed by beleaguered Portuguese lender Millennium BCP, which tapped its existing investors for fresh funds on February 3. With European equities recording a healthy return of 3.71% in the y-t-d, and 14.11% on the regional S&P Europe 350 Index (data correct to March 3), we expect activity to continue accelerating across the remainder of 2017, a forecast supported by the healthy pipeline for new listings at present due to a number of firms looking to list postponing their float last year, creating a backlog of candidates that may be ready to hit the public market in 2017 - especially while there is the added incentive to float before key elections in France, Germany and the Netherlands come around, which may alter the current risk-on environment among ecm investors.

From Slump To Growth
European IPO Deal Activity By Deal Value, USDbn
Source: PwC

This view can only be held when discounting any further major political headwinds hitting the Continent, of course - something that remains a key downside risk going forward. But even then we highlight that when political uncertainty becomes the norm, investors are swayed less by potential changes in government. For the time being, however, the core view of BMI's Europe team is that European stocks have upside potential, given what our Europe team sees as overblown election fears in key nations for the year head, an impact that makes the region's equities more attractive than US stocks as a result. To be more specific, we believe that while systemic risks to the eurozone posed by the upcoming elections in the Netherlands and France are very real, they are slightly overblown and not necessarily negative for local stocks. Given the cheap valuations on offer, particularly in Italy, and the cautious sentiment that currently prevails, anything short of a PVV (Freedom Party) government in the Netherlands or a National Front victory in France has strong potential to result in a relief rally. Conversely, should a populist shock occur, the European Central Bank (ECB) would be strongly inclined to support financial assets with yet further monetary stimulus, cushioning any downside move.

Coming From A Low Base

There is no way of dressing it up as anything else: 2016 was an extremely difficult year for the European ecm arena and, more specifically, for IPOs. PwC IPO Watch Europe data show that total IPO proceeds across the region were down by 51% y-o-y last year, falling to a level of EUR27.9bn, compared with EUR57.4bn a year previously in 2015. Similarly, deal volume declined too, falling to a level of 265 successful deals in 2016, compared with 364 twelve months before. Put these two numbers together and the average offering value in 2016 fell to just EUR184bn, a decline of 26% on the EUR248mn recorded across the duration of 2015. All in all, 2016 proved to be the slowest year for European IPOs since the global financial crisis.

The Nordic Alternative

With Europe's historically most popular destination for new listings, the London Stock Exchange (LSE), struggling last year, space was created for alternative equity platforms to pick up the mantle and host deals. To this end, the Nasdaq Nordic bourse (the exchange that unites 7 nations in Scandinavia and Eastern Europe: Denmark, Estonia, Finland, Iceland, Latvia, Lithuania and, perhaps the biggest contributor to the alliance, Sweden) lead the field, securing the highest combined value of deals of any single exchange across the region (EUR7.9bn), outpacing the LSE, which found itself occupying second spot in the rankings by the year-end (EUR6.7bn), with the Deutsche Boerse in third (EUR5.0bn). The result was that the Nasdaq Nordic hosted 28% of the value of ecm issuance across the region in 2016, including Europe's second and third largest floats last year, the EUR2,647mn listing of Danish government-owned developer and operator of offshore wind farms Dong Energy A/S from local investors in Copenhagen ( see BMI , ' Ding Dong, The European IPO Market Is Not Dead ' , June 8 2016), and the EUR2,113mn IPO of compatriot Nets, a Nordic card payments firm ( see BMI , ' Snap IPO A Potential Boon For US Tech Sector Floats ' , November 23 2016), with the latter representing the largest Nordic tech IPO on record. On the back of the Nasdaq Nordic stealing the European IPO crown away from London in 2016, we believe that the exchange has established itself as a viable alternative destination for European floats once the UK finally withdraws from the European Union, a timeframe for which is expected at some point in 2019.

The UK ' s Pre-Brexit Rush

The Brexit vote certainly hit UK IPO issuance hard last year: PwC data show that the value of London listings fell by even more than the European average, by as much as 59% to record a tally of a relatively paltry (when compared with recent full-year tallies) EUR6.7bn, down from a haul of EUR16.4bn recorded a year previously. The largest deal on the LSE in 2016 - medical products and technology company ConvaTec's EUR1.7bn float - was certainly a lot smaller than those setting the pace in recent years. Deal volume endured a similar, albeit far more muted, slump, declining by 27% y-o-y to close 2016 with a haul of 67 successful deals. For every deal that did complete there were plenty that failed to do so, with IPO cancellations and postponements becoming a common sight in London last year.

With a new year has come renewed optimism: of the 100 companies that have successfully tapped European ecm investors for funds during the y-t-d period (data correct to February 23), a large proportion of them (41) were in the UK, an exchange which has long had strong international appeal. We believe that the uptick in activity in London has shown that the UK is willing to fight for its European IPO crown, especially as the Nasdaq Nordic bourse has yet to host a listing this year. In contrast, across the opening to 2017, the UK has attracted the attention of deals from around the world, including a GBP5mn, early February listing from Canadian Toronto Stock Exchange-listed oil group Eco Atlantic (on the junior AIM bourse) and a proposed USD1bn listing from Middle East-focused exploration and production company Kuwait Energy.

For now, London's appeal to potential IPO candidates is simple: issuers in the UK capital still have access to deep pools of capital, which is not something that boardrooms with growth aspirations are likely to pass up on lightly ( see BMI, ' London IPOs To Enjoy Short-Term Bounce ' , October 5 2016). What is more, the benchmark FTSE 100 index is on a roll. According to Bloomberg data correct to March 7, the index is up by 2.90% in the y-t-d period and by 23.40% y-o-y. With BMI 's Global team favouring UK stock over US equities in the near term, there is every chance that the bull run may continue as well.

The Rush Is On

While political uncertainly is, as a rule of thumb, bad news for equities and for firms wishing to sell stock, Europe's political upheaval starting with the UK's June 2016 Brexit referendum vote and ending with the series of key election across the region this year suggest in the numbers that such a backdrop is serving as a boon rather than a hindrance for ecm activity. We believe this can be best explained by companies bringing forward the timeline on issuance to get deals across the line before the UK's exit from the European Union is confirmed when Article 50 is triggered by the UK government, a move which Prime Minister Theresa May previously stated could take place as soon as this month. Secondly, the dearth of investment opportunities in equities last year means that a high volume of investors have been sitting on cash, waiting for the investment window to open once more so that they can deploy capital. With the political headwinds having calmed somewhat (albeit with potential for another storm), ecm investors are taking the chance to put their cash to work.