Trusts hit equity issuance in 2006

If Canada’s equity market is searching for a catchphrase to sum up 2006, it might want to try “what goes up must come down.” While the S&P/TSX index closed at 12,908, delivering a 17.3% return for the year, the country’s income trust markets dropped significantly.

“The income trust mania that swept Bay Street to Main Street in 2005 had clearly fizzled in 2006,” writes Sherry Hum, financial analyst, capital markets, for the Investment Industry Association of Canada, in a report released Monday.

As a result of Conservative Finance Minister Jim Flaherty’s Oct. 31 decision to tax income trusts, investors stayed far away from the market. In Q4 2006, income trust financings were $2.0 billion, down 32% from Q3 and 35.7% from the same time last year.

If that sounds bad for trusts, looking at the whole of 2006, trust financing is at a four-year low, dropping to $12.0 billion, or 40.8% from 2005’s record issuance of $20.2 billion. The S&P/TSX Capped Income Trust index fell 10.8% in 2006; the year before, it rose 16.1%.

To make matters worse, private placements and IPO offerings were down about 70% from 2005, writes Hum, and last year was devoid of any high profile income trust deals.

The IIAC’s forecast for trusts is, predictably, unfavourable. “The diminishing appeal of trusts will likely cause investors and companies to hunt for alternative opportunities in the debt market and dividend-paying shares,” writes Hum, adding that 2007 “could be another challenging year for the trust market.”

Income trust issuance wasn’t the only segment of the market to be hit hard in 2006. After three record-breaking years, equity issuance was down 8.6% to a value of $45 billion. Despite the drop, it was still the third-highest year on record for the issuance market.

It wasn’t all doom and gloom for equities. Issuance of common shares rose 56.6% to $7.2 billion in the last quarter, but was down 14.1% from Q4 2005. Total common equity financings for 2006 totaled $25.8 billion, an increase of 16.2% over 2005. Common issuance accounted for 57% of the total equity financing market, compared to 45% the year before. “After losing the limelight to trusts over the past few years, common equity was back in vogue among investors,” writes Hum.

Still, total financing dropped 13.1% over last year’s fourth quarter, despite a quarter-over-quarter financing surge of 23.2% to $11.3 billion. Hum chalks this up to the downturn in the issuance and trust markets. “The pick-up in common equity issuance was not enough to offset the financing slowdown in other areas,” she writes.

The IIAC doesn’t expect equity markets to experience any dramatic changes in 2007. Hum writes that “a troubling trust market, weakening oil prices and growing uncertainty over the timing of expected rate cuts are worrisome,” but with a healthy mergers and acquisitions industry, and a global demand for metals, equity financings should remain close to recent levels.

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