To no one’s surprise, equity financing took a huge hit in the first quarter of 2008. In the Investments Industry Association of Canada’s new equity issuance report, the organization revealed that Q1 issuance dropped to $10.8 billion — down 23% quarter over quarter and 53% from last year.
“Despite measures taken by central banks to instill confidence in the global markets, investors and issuers appeared less receptive to participating in the equity new issues market,” says the report.
Thanks to the faltering IPO market, common equity issuance was down 20.6% year over year to $8.6 billion. In Q1 there were only 70 deals involving mostly small mining and exploration companies worth $277 million. That’s down a whopping 90.4% from last quarter and 66.1% from the same time in 2007. The largest IPO was worth $50 million. “A far cry from the $1.3 billion issuance… in Q4,” says the IIAC.
Income trusts also took a big hit. In the first quarter of 2008 there were only seven income trust issues totaling $355 million. These were the lowest quarterly trust issuance figures in about a decade.
The reason for the decline is fairly obvious — the sector is still hurting from Federal Finance Minister Jim Flaherty’s October 2006 income trust announcement and tax changes. It is unlikely trusts will ever regain the prominence they once had.
It’s not all doom and gloom though. The preferred shares market was actually up by 17% over last quarter and raised $1.1 billion in capital on seven offerings. “This is attributed to financial institutions re-strengthening their capital base,” says the report.
Limited partnerships also increased 74% over Q4 to $722 million on 23 deals. Most of the activity came from the financial sector.
Sectorwise, material stocks dominated in Q1 as “investors looked towards safe-haven instruments to help hedge against the slumping U.S. dollar and a volatile market,” the IIAC explains. Materials accounted for more than 50% of the common equity issuance in Q1.
The financial sector was responsible for the second-most issues, taking 36% of the overall share. This was the result of two issues from CIBC that totalled nearly $3 billion.
Commodity prices also shot up, as oil passed $100 a barrel and gold exceeded $1,000 an ounce.
The TSX fared well too, with volumes reaching a new high of 25.5 billion in Q1, up 3% from last quarter. However, the TSX Venture dropped in volume and value as investors looked more towards larger companies than small ones.
That resulted in a 7% decrease in overall trading, though 37 billion shares worth over $80 billion were still exchanged.
The IIAC predicts that Q2 will be as unpredictable as the most recent quarter was. The organization says that equity issuance will continue to face “volatile and less-than-ideal conditions.”
There are still questions around the U.S. economic slowdown, and how much of the sub-prime mess is yet to be uncovered. However, the IIAC says that recent federal and provincial budget announcements involved infrastructure spending, which could lead to a positive outlook in the markets.
The report also points out that the Montréal Exchange’s new Implied Volatility Index has been falling from highs it set earlier in the year. “The lower the risk,” the IIAC says, “the lower the perceived expectation of market turmoil.”
Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com
(05/16/08)