Equity offerings flag in second quarter

(August 11, 2005) Despite a strong rally in the Canadian equity market in the first half of 2005, there has been a dramatic decline in financing activity through the second quarter, according to the IDA.

Total new equity issuance has fallen by 15% — both in terms of the number of deals and their value — since the first quarter. The total value of new equity in second quarter was $10.6 billion, coming from 639 financings, leading the IDA to ask “Is the party over?” — the title of its latest equity market report.

“While the jury may be out on this, what is certain is that equity issuance has shifted to a slower gear this quarter,” the report reads. “The second quarter was extremely disappointing in light of the fact that total financings this period were even lower than last year’s mid-year slump. Clearly, investors were in a cautious mood amid growing worries over $60 plus crude oil prices and looming interest rate hikes.”

Almost all categories of financings have fallen, with the notable exception of income trust offerings. But even the trust sector is showing signs of tailing off, with a 6% drop in the number of deals and a gain of just 3% in their total value, to $5.74 billion.

Meanwhile, the value of preferred share issues has declined by 68% since the first quarter, to $670 million, with a year over year decline of 32%. There were just nine financings brought to market, representing a drop of 18% from Q1 and 36% year over year.

There were 571 common equity financings in Q2, worth $3.74 billion, but that represents a drop of 17% in value and 15% in the number of deals.

There were no issues in excess of $500 million in the second quarter, with the $462 million issue of ACE Aviation shares being the largest single offering. Offerings from Ivanhoe Mines and Kereco Energy rounded out the top three, with values of $158 million and $143 million respectively.

By comparison, the second quarter of 2004 saw such high-end deals as Shoppers Drug Mart’s secondary offering of $800 million.

“Undoubtedly, the high base comparison from last year’s record levels had distorted the yearly comparison,” the report said. “However, common financings this quarter were also off from a historical trend.”

Among common equity issues, there were clear sectoral preferences. Not surprisingly, resources represented the highest value of offerings, totaling nearly $2.3 billion, but this marked a decline of 12% from Q1 2005 and 13% from Q2 2004.

The service sector was home to the second highest value of offerings, but was worth only $535 million. There were $304 million worth of manufacturing stock issued and $280 million in the financial and real estate sector.

The total volume on the TSX for the quarter was 13.9 billion shares, a decline of 18% from the first quarter, but roughly in line with the second quarter of 2004. Combined volume of the TSX and the TSX Venture Exchange totaled 18 billion shares, a drop of 19% from Q1. This seasonal drop in volumes suggests there may be some truth to the maxim “sell in May and go away.”

The S&P/TSX Composite Index gained 3% in the second quarter, beating the S&P 500 which only gained 1%. The Canadian energy sector provided most of the thrust, as the heavily weighted sub-index climbed 12% on the back of higher oil prices.

The IDA report appears to answer its own question of whether the party is over, saying: “It is doubtful if the second half will repeat last year’s strong year-end finish … the big uncertainty is over oil. While see-sawing oil prices are nothing new, the $64 spike in crude oil prices this summer are a record high.”

The price of crude has since moved even higher, with oil futures touching $66 a barrel on Thursday.

“The new round of higher oil prices and ongoing supply disruption woes will continue to weigh against the economy and market in the coming months,” the report says.

In addition to rising energy costs, the IDA expresses concern over rising interest rates, which it fears could stifle equity investment. But there are also few “high-end deals” which could boost financing on the horizon.

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

(08/11/05)

Steven Lamb