Debt and equities teams review Brexit damage
Author: Sharon Kimathi
Brexit has had a disruptive effect on capital markets this year. Equities capital markets (ECM) faced a number of shocks and bouts of volatility that has led to initial public offering (IPO) cancellations, and a growing interest in share buybacks as a form of rescuing companies. While debt capital markets (DCM) has lagged behind in comparison to last year as in-house legal teams struggle with repapering efforts.
“We’ve seen huge swings of around 100 points in some exchanges each day,” said a portfolio manager based in London. “This is why it has been difficult to do ECM deals this year in such a volatile market.”
His firm is bearish due to the effects of Brexit-related news to the markets. “It’s been too expensive and onerous to do any deals,” he said. The deals he was wishing to partake in were mainly IPOs that have been on hold in London. “But now, we don’t know when those entities are coming back,” he added.
It’s been difficult for firms having to halt their IPO plans this year, and his concern is that there isn’t an opportune moment in the near future either for these deals to come back. Once the market loses momentum, it becomes an uphill battle to get it back to where it was. “But it’s not like it was doing great a few years ago, as that was the initial Brexit vote,” he added.
But Brexit has not been the only thing obstructing this investor’s appetite, as his instinct to stay away from investing in corporates or IPO deals was also linked to trade disputes between US and China. “It’s just not been the right environment this year, so we’ll wait and see,” he added.
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These may be the reasons behind 56 IPO cancellations on the London Stock Exchange (LSE) so far this year, both UK and internationally.
He is not the only one feeling pessimistic about IPOs, as one lawyer at a global firm based in London does not think there will be any IPOs in London this side of the December holiday season. “I think those companies will just leave it to next year,” he said.
Although the same cannot be said for his clients outside of the UK, as he has been working on IPOs for companies based in Ireland and Frankfurt. “Ireland has been up recently, and we still have some more up our sleeve,” he added.
He also spots a trend emerging from his UK-based ECM clients, as more entities are looking at share buybacks as a form of keeping the company afloat. “No one knows how Brexit will take shape, so some clients are issuing shares to stay solvent or as a precautionary method,” he added. This has mainly happened to retail and high street companies such as Patisserie Valerie, who have released equity in order to rescue their businesses.
Key Takeaways
- ECM has been affected by swings of 100 points in exchanges due to Brexit related news, leaving investors feeling bearish;
- There have been 56 IPO cancellations in the LSE so far this year, but there is a rise in IPOs in Dublin;
- More entities are looking into share buybacks as a form of rescuing the company;
- Banks and corporates are considering mergers and acquisitions to help with Brexit;
- DCM forsees a quite end of year in terms of volume of issuance in London;
- Treasury teams concerned about financing may have accelerated their bond issuance to earlier in the year to avoid Brexit damage;
- In-house legal teams and private practice DCM are focusing on repapering efforts.
“The main concern is ensuring these firms have enough liquidity,” said Stephen Baseby, associate policy and technical director at the Association of Corporate Treasurers (ACT). So the companies will inject loose cash in the system to cover any delays in revenue. “Members are also waiting to see the practical effects on the business and influence on cash flows,” he added.
Elsewhere, corporates and banks have turned to other equities solutions such as acquisitions in order to stay afloat or maintain their EU passporting access. Stifel’s London unit is said to have acquired MainFirst’s businesses in Germany, where it holds a full banking licence. This ensures that Stifel can continue to offer advisory and brokerage business in the EU post-Brexit.
Banks are also making the necessary relocation preparations to ensure smooth trades with EU entities after March 2019. “It depends on the trades, but most ECM desks are looking at Frankfurt, Paris and Amsterdam,” said an analyst at a US bank based in London. “Then management looks at Warsaw for back-office staff.”
DCM paints a similar picture to its equities counterpart. “People are normally doing deals at this time of the year, and it’s all sort of stopped this time – there are none in the pipeline at the moment,” said another partner at a global law firm based in London.
She said that this time last year was when she worked on a debut debt issuance for a bank, as it is the lead-up to bankers’ bonuses – so the more deals the better. But this time, the dry market cycle is not appealing to investors.
“Those concerned about debt financing probably accelerated their debt programmes,” said Baseby. This means that the debt market would have had a roaring start to the year when issuers sped up their debt issuance to curtail Brexit’s effects, which are likely to be exacerbated at year-end.
“I would recommend just sitting on it, since I would not invest at this moment,” said a managing director at a London-based bank. Although it depends on the name, and whether the entity needs funding, the general feeling in the market is not to issue anything until next year.
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Baseby acknowledges that those issuers that do borrow internationally in currencies such as US dollars and euros to match off risks are concerned about the avenues to do that in the future. Which is why corporates and banks turn to relocation as a measure to safeguard them for future market disruption with payments.
“So our members are dusting off debt issuance vehicles in the eurozone to make sure it’s ready to be a domestic EU27 borrower, alongside having a separate issuing vehicle in the US for dollars,” said Baseby.
The option of having a New York-based entity as an alternative issuing entity post-Brexit is also gaining traction. One senior in-house lawyer at a US bank based in London thinks it will be smoother to transact with EU entities out of the US since it has equivalence with the EU. “I suspect that we’ll be seeing sizable chunks of businesses relocating to the US as a backstop or fallback option as it has equivalent rules,” she said.
Aside from restoring dormant continental European entities, some firms have been setting up new entities to ensure they can still issue bonds and do business with EU-based investors. Once the revived EU entity obtains the relevant licences, it falls to the in-house legal teams to amend the prospectuses and possibly issue new documentation with the new EU-based entity.
The partner has been working on setting up new entities in Ireland for her clients, which also entails repapering them. “It leads to novating contracts all over the place to ensure people don’t trigger termination or tax clauses,” added Baseby.
He points out that repapering is something his members do not wish to go through. “It’s also small things like making sure that debt programmes from UK entities as the underwriter will no longer be in euros, which is minor but it needs to be done,” said the partner.
“But again repapering doesn’t seem to be a magic wand, as you will still need a detailed review of those transition documents,” said Baseby.
Market participants also indicated that firms that have relocated will continue their plans even if there is a deal in place, as moving and setting up has taken too much time and money to reverse it.
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