There’s a marked decline in equity raising due to market volatility; corporate bond activity continues to break records
Challenging markets contributed to a year-on-year decrease in capital raising activity in 1H 2012, compared with the same period a year ago. Total proceeds fell 35% to $123b, with a 16% decline in volume of issues. There has been almost a 50% reduction in the number of companies raising capital, and a marked decline in equity raising due to market volatility.
However, corporate bond activity continues to break records, following on from a strong 2011.
Capital raising outlook
We expect the corporate bond market to remain strong in 2012 for investment grade issuers, with sustained but volatile demand for higher-yielding sub-investment grade issues by mid-tier companies for project development.
With funding options (both equity and debt) tightening for juniors, we may see bond investors with higher risk appetites (such as hedge funds) willing to fund quality projects in smaller companies.
The IPO markets are expected to remain difficult, with companies unlikely to pursue large issues in the very short term, at such dilutive levels.
Signs of recovery in global equity market conditions over the second half of could lead to an increase in IPO activity in Q1/ Q2 2013.
Markets are volatile and sentiment-driven: pockets of confidence will drive investor demand, but companies may increasingly look to strategic investors willing to invest for the long-term.
Funding may come from Asian lenders, made via co-investments in overseas projects with local state partners such as infrastructure developers. Such investment often comes with additional ties, however, such as a share of future offtake.
Multiple options need to be pursued to raise finance at the right price in order to create competitive tension and ensure that reliance is not placed on just one source of finance.
IPOs – a dramatic drop-off
Market volatility has had a profound impact on 2012 IPOs across all sectors.
The mining and metals sector has been particularly impacted due to a decline in investors’ appetite for risk, and lower valuations, which have resulted in issues being too dilutive for foundation shareholders.
IPO volume fell 37% to 47 IPOs in 1H 2012.Proceeds decreased by a significant 80% (excluding Glencore) to $0.9b, from $4.3b in 1H 2011.
All major mining capital markets were impacted, with lower volumes, reduced prices and deferrals experienced on the Hong Kong, London, Australian and Toronto exchanges.
The largest share of proceeds were raised in Hong Kong ($644m), with the TSXVenture exchange attracting the highest share of junior IPOs at 22 — still a 53% year-on-year decline. The largest crossborder IPO was that of China’s Rare Earths Global, which raised $322m through a listing on AIM to capitalize on demand outside of China.
IPOs remain on the corporate agenda but in such a volatile market, only the ASX and TSX-V are seeing real volumes. A relatively small number of explorers are raising minimal funds through IPO in order to gain a market presence for future raisings.
Short term financing solutions (including private placements and debt facilities) are being sought as interim solution for those in need of immediate capital.
Follow-on equity – in free-fall
Proceeds raised from follow-on issues of equity are also down significantly year on year, following a particularly volatile 2Q 2012.
Volume declined by 18%, while proceeds dropped 69% to $10b, from $32b in 1H 2011.
This was the result of fewer large issuers and a reduction in funding to the juniors.
Mid-tiers and advanced juniors attracted equity investment to fund the development of quality projects and acquisitions. However, early stage explorers are faced with fewer options and challenging market conditions, with average proceeds by this group falling to $3m in 2Q 2012.
Convertible bonds – project based funding
Convertible bonds showed a year-on-year increase in volume and proceeds in 1H 2012, largely driven by small-scale project-based funding for advanced juniors / mid-tiers unable to access straight bonds.
Over $2.1b of proceeds were raised, compared with $2.0b in the same period a year ago.
Convertibles can be an attractive investment option in periods of volatility, offering investors some downside protection.
Australian issuers took the highest share of bond proceeds, offering opportunities for investors to participate in the growth potential of Australia’s mining industry growth.
We have also witnessed a number of strategic investors taking cornerstone positions in convertible bonds during the first half of the year, including Mount Kellett Investors in Lynas Corp $225m issue, and China Railway Materials in African Minerals 8.5% notes due 2017.
Corporate bonds – continued demand drives record proceeds
The popularity of corporate bonds continued during 1H2012, with a 29% increase in proceeds to $59b from $46b year on year.
Corporate bonds remained an attractive funding option for the majors looking to refinance, push out maturities and lock-in favorable long-term yields.
The first half of 2012 was about windows of opportunity, reflecting fluctuating market confidence.
There was a slow start and end to the first six months, with a clear preference for quality compared with 1H 2011.
But mid-tier companies found pockets of demand in March and May for high yield issues and we expect that sustained (albeit volatile) demand for yield should provide valuable support for mid-tier producers and advanced juniors in the second half.
The first half of 2012 witnessed a greater share of volume by emerging market issuers accessing US dollar investors, looking to secure rates ahead of an expected increase in US treasury yields.
Nearly $9b of investment grade Euro bonds were raised, despite challenging market conditions in the Eurozone reflecting investor demand for quality investment opportunities.
Record low coupons were again achieved by investment grade majors. Conversely, yields remained relatively high for subinvestment grade mid-tier companies, driving demand among yield-seeking investors.
Syndicated loans- major refinancing, but little project financing
Syndicated loan proceeds declined 46% in 1H 2012, to $51b from $95b in 1H 2011. Large deals have been reserved for A-rated borrowers with strong banking relationships - for example, Glencore’s $12.8b refinancing with a 91-strong syndicate of lenders.
However, with over half of this year’s loan proceeds used to refinance of existing agreements, very little new money is flowing in, particularly for project finance.
During 1H 2012, $2.9b worth of project finance was closed, the largest deal being a $1b facility for First Quantum minerals’ Kansanshi copper mine.
A mandated pipeline of $10.8b in 2012 is still to be financed.
With Basel III making it increasingly difficult for Western banks to provide anything other than short-term loans at competitive prices, we will continue to see a significant shift away from traditional long-term, project-based bank lending in the sector, and an increased role for alternative lenders and funding structures.