Canadian businesses got the ultimate holiday gift this season: a hot equity market.
Investors are jumping at almost any new stock issue that comes their way, meaning companies should have no problem raising new cash early in the new year.
A slew of private companies in the booming resource sector have sat on the sidelines since the financial crisis. But given soaring valuations, some of these firms are finally going public.
"I don't like to extrapolate from one month or eight weeks, but we've had no problem continuing to come to the market with financings, often to the same investors or groups of investors," said Scott Larin, head of equity capital markets at Wellington West.
For a long time smaller resource companies could not come to market, especially after the first bout of the Europe debt crisis this past spring, but now investors in Canada, the U.S. and Europe want to own these names, Mr. Larin said.
Examples of Wellington's deals include Tuscany International Drilling Inc.'s $46-million common share offering, and SkyWest Energy Corp.'s $32-million financing. These aren't the most well-known businesses, but that's the point. Educated investors are willing to take a risk on the more speculative plays.
"They're believing in the longer-term trends for precious metals, oil and gas, base metals," Mr. Larin said.
The big institutional players who like the riskier names aren't the only investors who are back in the market. Retail investors are throwing themselves at anything with an attractive yield - particularly convertible bonds. These buyers are tired of low returns from most debt products, and they finally feel like they can trust equity markets again, said Roman Dubczak, head of equity capital markets at CIBC World Markets.
For 2010 the Toronto Stock Exchange is up 14.5 per cent and market volatility is just a fraction of what it was this past spring. The VIX index, a measure of this volatility, is back to where it was before European debt fears hit headlines in April.
Issuers want to raise money while they can. Most oil and gas firms released their 2011 capital expenditure programs over the past few weeks and their estimated budgets point to expansion, which requires cash.
However, Mr. Dubczak said many larger companies are "cashed up" - they already have the funds they need - so new issue strength is likely to come from the smaller players.
We're "getting back into a bit of a growth market," he said, in which investors see much more opportunity investing in a $30-million market capitalization company versus one with a $500-million market cap. "You've got a better bang for your buck with the smaller one in a rising commodity market."
But that doesn't mean investors are selling the big companies. "It's not a rotation out of large-cap into small-cap, it's just that there's a lot of money available," Mr. Dubczak said.
Investors' appetite for smaller names bodes well for the IPO market. In contrast, 2010 was a rocky year that saw companies like Porter Airlines, and TransAxio Highway Concession pull their deals. But the last two months have been promising with some resource companies like Royal Nickel raising the money they needed.
CIBC was behind a lot of the deals, including the recently closed Pretium Resources Inc. transaction, so Mr. Dubczak knows what he's talking about. But he cautions that private companies cannot simply turn on a dime and launch an IPO. These deals require 6 to 12 months of preparation, which includes due diligence, a proper valuation and marketing the company to prospective investors.
Despite all the optimism, some investors will say they have heard this story before. Equity issuance was also on fire last fall, with deals like Barrick Gold Corp.'s $4-billion common stock offering hitting the marketplace. Ultimately that rally died, in part because of fears that the U.S. economy might be headed for a double-dip recession.
This time around, market fundamentals are much improved. Mr. Dubczak says most people are counting on slow but steady growth in the economy.
Commodities are driving the rally, as investors and analysts expect strong demand for raw materials from already booming emerging markets.
Issuers and the investment banks have learned their lesson from failed IPOs. "For the deals that we've been involved with," Mr. Larin said, "issuers and [investment banks]are matching the terms to what the market will bear.
"The deals are selling well, and the stocks are performing well after the fact."