Recent trends indicate that the pick up in corporate finance transactions, especially in the equity capital market may be petering off. After hitting an unprecedented high in June as the market reached the head of what had previously been seen as a fake head and shoulders formation, the July afterburners in the secondary market did not translate into primary market strength.
Additionally, the August run rate indicates that the primary market may well have peaked in the May-June timeframe. In the current year the sector which has benefited the most from primary market issuance has unquestionably been Financials, where over $96 billion has been raised in the form of 251 issues.
A distant second at less than half the total proceeds is Materials at $42 billion with 3968 unique deals, and bronze goes to real estate which managed to raise $37.5 billion in 162 deals. On the other end, the sector least in need (or least capable of raising) equity capital is telecommunications with just $3.6 billion in 29 deals and retail just above it at $3.8 billion in 43 deals.
Yet retail is probably the sector that has benefited the most from the irrational exuberance over the past few months: could this be indicative that neither companies, nor potential investors take the overinflated retail valuations as conducive to a "value" primary entry point? If these companies are unable to capitalize on the ramp up in equities, what good is the use of company stock as valuation proxy? True, stocks can hit 1000x P/E but if this can not be converted into much needed corporate cash, what good is any such rally (click to enlarge)?
Yet what some may perceive as weakness in equity, has translated into strength for not only investment grade, but also high yield bonds. Primary market investors are gradually retracing and instead of looking at 20% returns promised by primary market operations, they are now content and much more interested with picking 5-10% returns.
LTM Investment grade bond issuance (click to enlarge):
The sectors benefiting the most from a high yield issuance bonanza include Media and Entertainment, raising $15.6 billion in 36 deals, followed by Energy and Power and Materials, with $12.4 and $12.2 billion, in 38 and 28 deals, respectively.
Ironically, only 2 real estate high yield deals have been completed to date for $822 million, with consumer services, and retail both lagging once again at $2.4 billion and $3.4 billion, in 8 and 7 deals. Either the retail sector is in no need of capital market access (both equity and debt), or potential new issues are scarce due to pervasive lack of interest: this will definitely have to change as bonds mature, or as retail companies need to expand and grow. The question is how much more attractive will yields and multiples need to get before the sector succeeds in generating primary interest (click to enlarge).
Looking higher in the capital structure reveals a troubling trend: loan issuance is not picking up, which is concerning as this is the one place in the capital structure where numerous maturities are upcoming. How easy it will be to refi loans when 3 month Libor is below 50 bps is very questionable, and again highlights that the need for Libor floors (likely around 2-3%) and wider spreads will be a staple of most new deals. Look for this market to accelerate in deal volume as interest in equities and high yield bonds moderates.
Not surprisingly, sectors with stable collateral value are the ones that have seen the bulk of YTD issues including Energy and Power ($230 billion, 372 deals), Industrials ($146 billion, 578 deals) and Materials ($143 billion, 298 deals). On the trailing end, Real Estate is again lagging with just $30 billion done in 208 deals, while retail is in the middle of the group, having raised loans for $48.8 billion in 175 deals (click to enlarge).
A boon for merger arb accounts has been the June record number of new M&A deal announcements, which however has started to dissipate in July, while August seems to be indicative more of Hampton's style deal making than its Wall Street counterpart.
The most active sector is Financials, followed by Materials and Energy and Power, the three combining for over $600 billion worth of deals. At the bottom is retail, with only $15.5 billion of announced YTD deals (click to enlarge).
Lastly, project finance continues being completely dead as a dealmaking category (click to enlarge).
Source: Thomson Reuters