2005 heading for equity issuance record

The Canadian market is on track to set a new record in annual equity financings, following an uncharacteristically hot third quarter, according to the IDA.

While the summer months usually see lower levels of market activity, the third quarter saw financings valued at more than $12 billion, an increase of 9.6% from the second quarter. At the same time, the number of deals dropped by 23.4%, pointing to a much higher average value.

So far this year, there have been $35.6 billion in equity financings, an increase of 11% over 2004. Income trusts remain the driver of much of this growth, accounting for $5.65 billion in 52 issues. The number of these financings is up 8.3%, but the value is off slightly, by 1.6%.

Secondary trust offerings accounted for $2.9 billion of the quarterly total (24 deals), while initial offerings made up $2.3 billion in 19 deals. On a year-to-date basis, income trusts have accounted for $17 billion in new issuance, making up 48% of total issuance, 56% higher than 2004.

“Trust issuance is not only up profoundly from last year’s levels, but has accounted for almost half of the industry’s total equity financings so far this year,” the IDA says. “While this year’s trust party has been a runaway hit, the good times may be coming to an end.”

That’s because much of the quarter had already passed before federal Finance Minister Ralph Goodale announced it would study the tax-implications of the trust structure. Many now fear that the structure is at risk.

“The increased market uncertainties caused by Mr. Goodale’s plan should fast track the inevitable slowdown of the trust market,” the report says. “Until the government’s broader intentions become clearer, trust financings should slow sharply in the coming quarters.”

Still, the IDA does not expect the slowdown will be pronounced enough to wipe out the strong gains already made this year and 2005 should still set a financing record.

Second to trust financings, common equity issues remain strong, raising $5.33 billion, up 28.8% from Q2, but off 17% year-over-year. The number of financings fell 26.3% from the second quarter, to 431.

“Common financings have not only been on a downtrend this year, but have lost their reign in the financing market. With income trusts all the rage this year, common equity has taken a back seat among investors — an all-time first,” the report points out. “However, with income trusts cooling off, common financings will likely be back in vogue in the near term.”

Compared to the third quarter of 2004, the size of the largest deals has collapsed. Last year witnessed a $3.1 billion issue from Petro Canada and a $506 million deal from Jean Coutu. This year’s largest issue — Royster-Clark Ltd. — totaled just $325 million.

The long-running commodity rally helped to make resource stocks the most common of common equity issues, accounting for 44% of the new issuance market, by value.

Aside from having an impact on common equity, the trust sector’s income component continues to take a bite out of the preferred shares market. There were only $880 million in new preferred offerings in the third quarter, which represented a 30.7% increase from Q2. The number of such financings fell 11.1%, to just eight deals.

Summertime did stick to its usual pattern of lower trading, with TSX volume falling 16% from Q2, to 16.1 billion, but on a year-to-date basis, volume is up 21.6%.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com