Canadian Underwriting: A Year to Remember

By Andrew Willis

Canada's bank-owned investment dealers began their fiscal year fearing for their survival, with the financial crisis wiping out Wall Street icons.

Now the country's six biggest brokerage houses have put fiscal 2009 to bed in grand style, recording the best 12 months they've ever seen in equity underwriting. That gushing sound you hear on Bay Street is the sound of the bonus pool filling up.

Led by a blockbuster showing from RBC Dominion Securities, domestic dealers saw stock sales jump by 58% over the past year, to a total of $47.3 billion (U.S.), according to data compiled by Bloomberg. The Street pulled in more than $2 billion in fees for this underwriting activity.

The surge in financing activity marked a year that played out in two distinct phases. Last fall, as the financial system unravelled, companies scrambled to plug holes in their balance sheets, with banks and insurers rolling out massive stock sales.

Once the equity market started to rally in March on expectations of an economic recovery, the spotlight shifted to deals from resource-focused companies that needed capital for expansion. Institutional investors stopped buying low-risk blue-chip stocks at perceived discounts, and began loading up on smaller-cap plays, stocks that outperformed as markets rallied. The one constant over the entire year was a furious pace of activity, and a number of extremely large transactions.

Nine underwritings were for more than $1 billion, including Barrick Gold's (ABX) record-setting $4.4 billion (Canadian) stock sale in September, the largest single equity issue ever done in Canadian markets. With one exception (utility TransCanada (TRP)) the remainder of the $1 billion club were financial companies, including Royal Bank (RY), Toronto-Dominion Bank (TD), Intact Financial, Manulife (MFC) and Bank of Montreal (BMO).

So while Royal Bank boss Gord Nixon will doubtless be thrilled at what his colleagues at RBC Dominion achieved, he will also wince at the fact that the investment bank succeeded in part on the back of a $2.3 billion share sale last December from the parent bank.

While the bank-owned dealers continue to dominate the domestic market, global houses such as J.P. Morgan (JPM) and Morgan Stanley (MS) won their share of the largest offerings.

The single largest consumer of capital over the past year were the mining companies, in large part because of that massive Barrack Gold financing. The mining sector accounted for 34% of all Canadian equity underwritings, measured by the value of the deals. Financial stocks were 27% of the new-issue market, while energy companies accounted for 15% of the stock sold over the past year.

Comparing this year with last, the top five equity underwriters in fiscal 2008 were, in order, CIBC World Markets, RBC Dominion, TD Securities, BMO Nesbitt Burns and Scotia Capital.

The corporate debt market was quieter over the past 12 months, in part a result of the credit crunch that halted new-issue traffic from the final months of 2007 through the spring of this year. Total Canadian corporate debt financings fell 25%, to $46.5 billion (Canadian), according to Bloomberg.

RBC Dominion was the top corporate debt underwriter over the past 12 months by a wide margin, leading $14.5 billion of fixed income offerings for 64 clients, which was good for 31% market share. Rounding out the top five, Scotia Capital ranked No. 2 on corporate bond sales with a 22% market share, followed by TD Securities, CIBC World Markets and BMO Nesbitt Burns.

Commissions on bond underwritings are a fraction of what the Street earns selling stock, so despite the fact that roughly the same amount was raised in equity and fixed income markets, the dealers' revenues were just $232 million from corporate debt financings.