No record-breaking numbers for equity issuance

It will come as no surprise to anyone following the markets, but equity issuance was down in Q3 after two record-breaking quarters.

The Investment Industry Association of Canada reveals in its New Issues & Equity Trading report that total financings in 2007’s third quarter were down 47.7% over those of the previous quarter. It’s the first time total issuance dropped below $9 billion in the past 18 consecutive quarters.

Ian Russell, president and CEO of the IIAC, expected the lower numbers. “The credit markets all peaked in mid-July, and then August and September were pretty bad months,” he says. “Prices reflected the uncertainty with large sell-offs in the market.”

One category that had difficulty was common equity issuance, which dropped 39.4% quarter over quarter. Income trust issuance fell significantly too — by 52.4% from last quarter and 50.2% year over year.

Preferred shares were virtually “non-existent” says the report, coming in at less than $100 million.

Despite the drops, it’s not time to mourn the passing of a robust equity market just yet. Compared to last year, issuance is down only 5.9%, not bad considering how volatile the markets have been.

And because the first two quarters fared so well, the first nine months of 2007 are ahead 22.4% over last year’s January-to-September figures. “At this pace, total equity financings should finish the year in record territory, surpassing $50 billion, and the old mark of $49.2 billion set in 2005,” says the IIAC.

Large corporate deals have also helped blunt the bad news. Secondary offerings and private placements with large financings meant that corporate deals exceeded $100 million. There were 71 mega-size equity issuance deals in the first nine months of the year, compared to 64 deals in all of 2006. “These transactions have contributed $16.1 billion to the total, making up 47% of all issuance for that group,” the IIAC explains.

Still, total trading volumes were down 11.1% from Q2 2007. The TSX saw a 7.8% decline, while the TSX Venture exchange saw a whopping 17.1% drop.

Russell expects more volatility in the coming months, especially after the ups and downs the market has seen in January. He says Q4 should experience a bounce-back, which will help issuance finish the year at a record high.

“We saw confidence come back in the market in the fourth quarter,” he says, adding that he doesn’t have the hard numbers yet. “The comeback was in commodity markets, especially energy and agricultural commodities.”

But whatever gains are made in Q4, they will likely disappear in the first quarter of 2008, only to rebound in the last six months of this year. “I think the economic performance of Canadian and U.S. economies in 2008 will be better than most people are expecting right now,” says Russell. “Sentiment will turn more positively when we see more positive numbers come out and start seeing recovery in the second half, and equity markets are going to account for that. We’ll see that showing up in markets sooner rather than later, especially on the commodity side. Financing activity will improve over the course of the second half of this year. We’ll start to see the beginnings of a turnaround within the next quarter.”

Still, 2008 won’t be a record-breaking year. “I think 2007 will be a record, but 2008 will be down from that,” Russell admits. It will be higher than a lot of people expect, though.”

While Russell remains optimistic, other parts of the market are showing signs of potentially long-term stress. Specifically, the Canadian term-structured finance market saw total issuance drop 60.9%, from $18.21 billion in 2006 to $7.1 billion last year.

Standard & Poor’s, the rating agency that released the structured finance numbers, says the decline was due to the turmoil in the asset-backed commercial paper market. “[The year ended] feeling a clear knock-on effect from the turmoil in the global credit markets as well as the dislocation in the Canadian non-bank ABCP market in the summer,” says S&P in its report.

Needless to say, asset-backed security issuance was down considerably over 2006. There were only six issues in 2007, compared to 22 the year before.

Issuance was down in all asset classes, but credit card and auto financing were hit hardest, dropping nearly $4.5 billion and $1.6 billion, respectively.

S&P says a lot needs to happen in 2008 before asset-backed securities can regain their strength. “Investor confidence in this market will need to be restored before term transactions will return to the market with any degree of regularity.”

The company continues to say that increased confidence will depend on whether or not the Canadian economy can “absorb any knock-on effects” from the U.S. slowdown and how that will affect asset performance here.

“Generally, the asset performance in Canada hasn’t deteriorated as it has in the U.S.,” says S&P. “However, the passage of time will demonstrate whether this is due to the inherent robustness of the Canadian economy or simply a lag effect from the events in the U.S.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(01/28/08)

Bryan Borzykowski