Australian capital markets shrug off worst of global instability

Capital markets bankers began to feel a bit better as the initial public offering pipeline started to fatten up.

Equity capital markets

After a deflating first half of the year, capital markets bankers began to feel a bit better as the initial public offering pipeline fattened up.

But in the space of a few weeks, things went from bad to worse as Brexit and an inconclusive election in Australia threatened to wipe equity and debt deals off the table.

However, capital markets are holding up despite proliferating political uncertainty across the globe, with airline Virgin Australia yesterday pressing ahead with an $852 million equity raising and National Australia Bank securing $US4 billion from US bond markets.

“It looked like a very strong transaction and augurs well for the banks generally,” Barry Sharkey, UBS’s co-head of capital markets, Australasia, said of the NAB deal, the first debt raising by an Australian bank since Brexit.

“What usually happens when there is a structural shift or big surprise like Brexit is it usually starts with the safe haven, bullet proof names reopening the market and then gradually investors come back and start to look further down the credit spectrum.”

Late yesterday, Commonwealth Bank priced $2.25bn of local five-year bonds at 121 basis points above the swap rate, confirming that markets remained open for highly-rated borrowers.

The price was only slightly more expensive than a $1.8bn deal by Westpac early last month at 117 basis points. Woodside issued Swiss franc debt last week, while British bank Lloyds sold $US1bn of bonds — after voters shocked markets by opting to leave the European Union.

“The bond markets have been pretty orderly and the new deals that have come from Aussies and foreign corporates have been very well supported,” said Mr Sharkey. “And anything that borrowers have given up in terms of credit spread they’ve prob gotten back in underlying interest rates.”

Omkar Joshi, an analyst at Watermark Funds Management, which invests globally, said the spike in credit market jitters after Brexit had come back down and initial public offerings were still being marketed.

“The markets are probably being more rational and efficient than in the past, and issues are more specific,” he said, albeit cautioning that the quality of IPOs needed to be scrutinised.

In the six months to June 30, Australian companies issued $US71.6bn of bonds, flat on the same period last year, according to Thomson Reuters. Equity capital markets — such as floats and raisings by listed companies — were less healthy, with issuance down 62 per cent to $US7.6bn.

A 29 per cent slump in IPOs to $US1.8bn — the lowest first half since 2013 — dragged. But equity activity picked up during the second quarter and senior fund managers said the IPO pipeline was building.

Candidates include poultry producer Inghams, petrol station site owner Viva Energy, retailer The Good Guys, grinding ball producer Moly-Cop, retailer Super Amart and radiology company I-Med. Investors could also be shown new property trusts by Crown Resorts and Charter Hall.

David Wood, head of investment banking at Bank of America Merrill Lynch, said shocks like Brexit can paradoxically result in strong demand for Australian companies.

“Aussie businesses trying to IPO in Australia could still experience good demand as global investors look at Australia’s good growth relative to other countries,” he told The Australian last week.
“So I don’t think the IPO market will be bad. Compared to many other markets, Australia is in a good spot.”

With interest rates at record lows, Mr Sharkey said many of the mooted of IPOs would appeal to investors seeking yield while other candidates were solid businesses that should win support if they come to market with “sensible valuations”.

“We’re still in a world where investors want new ideas and new assets to own because there’s still things being taken away from them, whether it’s Asciano or other things,” he said, referring to the loss of companies from the stock exchange through takeovers.

Along with handling Virgin’s raising, UBS worked on Mayne Pharma’s $900m share sale just days after Brexit and Mr Sharkey said they were “bowled over” by investors.

He said the biggest headwind for deals was the US election in November, rather than interest rate decisions by the Federal Reserve, China’s growth or even Europe “because it’s going to take so long to work through”. The local election was also not a major concern.

“It’s more about ‘could we have another black swan outcome in November,” he said “That’s probably the main thing that could impact (IPO) windows.

“We would be cautiously optimistic they’ll be some decent flow with that number of names being talked about and speculated on and the only thing that changes that is some other unforeseen market shock or Trump.”