Peaking interest rates drive bounce back for corporate borrowing and stock sales to end 2023

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Investors started putting their cash back to work in the final months of 2023 as they came to believe interest rates had peaked, allowing companies to raise more money and start returning to growth in 2024.

Corporate borrowing and stock sales bounced back last year from the generational lows of 2022, according to data being released by Refinitiv on Thursday. Merger and acquisition activity was down compared to 2022, the numbers show, but experts are optimistic that these transactions will rebound in 2024.

Canadian businesses raised $68.9-billion through public debt markets in 2023, a 41 per cent increase from the prior year and slightly above the most recent 10-year average of $68.2-billion. They also sold $17.8-billion worth of stock last year, which despite being less than half of the most recent 10-year average, $36.7-billion, nonetheless represents a nearly 37 per cent improvement over 2022.

As recently as October, Bay Street was bracing for a prolonged stock sale slowdown, as a higher-for-longer interest-rate mentality took hold.

“Until the market is convinced there will be no more rate hikes, I truly believe we are unfortunately going to be treading water,” Peter Miller, head of global equity capital markets at Bank of Montreal, which was the top investment bank for stock deals in 2023, said at the time.

That has now happened, Mr. Miller said in another interview last week.

“Markets since the end of October are up by double digits,” he said. “It is crazy how fast it has bounced back. Investors are in a much better mood, and with peak rates having been hit cost of capital is as high as it is going to go and equity valuations are also rallying, so your cost of capital is going down.”

Patrick MacDonald, co-head of Canadian debt capital markets at RBC Capital Markets, which was the top investment bank for debt deals in 2023, said the belief that interest rates have peaked has also played a role in the rebounding corporate bond market.

“There were points early on in 2023 where there was almost a level of acceptance that higher-for-longer rates were here to stay and we have delayed our issuance already so let’s get back into the market,” Mr. MacDonald said. “As we moved into the fourth quarter late into the year, we found a dramatic move in underlying rates that will tempt issuers to re-engage in the market.”

The size of the deals that got done in 2023 was also encouraging, he said. For example, CN Rail CNR-T sold $1.75-billion worth of bonds in May, and Rogers Communications Inc. RCI-B-T did a $3-billion bond deal in September.

“It is encouraging to see the available funds for corporate Canada in the local bond market,” Mr. MacDonald said.

Merger and acquisition deals involving Canadian businesses totalled US$183.9-billion in 2023, a 27 per cent decline from 2022 and nearly 21 per cent below the most recent 10-year average, US$232.5-billion. Scott Foster, managing director and Canadian practice leader with Alvarez & Marsal’s global transaction advisory group in Toronto, said the main reason for the decline was simply that deal making was moving at a much slower pace in 2023 than in the previous two years.

“Everything we saw took longer and there were a lot of deals that didn’t get closed before the end of the year,” Mr. Foster said. “Deals were moving so fast in 2021 and the diligence was different then versus now, where we are back to a pre-2020 cadence where it is taking a little bit longer. It is maybe even a bit slower than it was before.”

But he said he has reason to believe private equity firms “will bring people out of their slumber” in 2024.

“Private equity groups who are going to want to raise capital in 2024 are going to need to exit businesses to show that they can do that,” Mr. Foster said. “On the flip side, there are a number of groups that have raised capital over the past several years but have not deployed very much of it, and they will start to feel the pressure. If you raised capital in 2020 or 2021 and you didn’t put any money to work in 2022 or 2023, the clock is ticking.”

Confidence among Canadian business leaders is growing, BMO’s Mr. Miller added. “I can feel it, they are starting to go back into growth mode,” he said.

“They are looking at new projects and looking at M&A. Don’t get me wrong, I can’t see a bonanza, but I do think that 2024 is going to be significantly better than 2023.”