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It is a good time to be an investment banker focused on debt. Not so much for equity underwriters and mergers and acquisitions specialists.

Extreme market volatility and a deteriorating economic outlook have thrown equity financing and M&A activity into a deep freeze. Investment-grade corporate bond issues, by contrast, have staged a remarkable comeback in recent weeks, as companies look to build up cash reserves and lock in longer-term funding to avoid problems in short-term lending markets.

In late February, the market for new corporate debt came to a shuddering halt as panic gripped investors and issuers alike. No new investment-grade bonds were sold in the United States in the week of Feb. 24, and just one deal – a $1.1-billion bond sale by Hydro One Inc. – was done that week in Canada.

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Five weeks into the market downturn, things look very different. U.S. investment-grade corporate bond issuances hit a record high of US$82.4-billion in the week of March 23, while large Canadian companies, such as Rogers Communications Inc. and TC Energy Corp., have tapped the debt market in recent weeks for billions of dollars.

“A lot of companies are saying, clearly the economy is going to be challenged, so let’s ensure we have enough liquidity to run our business,” said Patrick MacDonald, co-head of debt capital markets at RBC Capital Markets.

Issuers have been helped in recent weeks by a cascade of central bank interest rate cuts. Spreads on corporate debt are still wide and new issue concessions – the premium companies pay to entice buyers to new debt – remain elevated, but issuers are clearly hungry for cash that’s on offer, Mr. MacDonald said.

Companies are also driven to the bond market by problems in the commercial paper market. As markets have become frothy, investors have been less willing to roll over commercial paper.

“The bond market is providing that liquidity that then enabled many companies to utilize their cash and help them fund their commercial paper redemptions," Mr. MacDonald said.

Canadian debt issuance – including from governments and Crown corporations – came to $45.4-billion in the first three months of the year, according to new data from Refinitiv. That is up 14 per cent quarter over quarter, although down 5 per cent compared with the same period last year.

“Overall global debt capital markets activity totalled US$2.3-trillion during the first quarter … the strongest three-month period for global debt capital markets activity since records began in 1980,” Refinitiv said in a news release.

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Things are very different in the equity market, where companies are wary of issuing new shares and further diluting their stock prices.

Canadian equity underwriting in the quarter was up year over year on the strength of a $1.5-billion bought deal by Telus Corp. in mid-February, and GFL Environmental Inc.’s $2.9-billion initial public offering and concurrent financing at the beginning of March. However, since the GFL deal – which is still underwater, having launched in a falling market – new equity sales have largely come to a halt.

The big question for equity bankers is how closely the current crisis will resemble the previous financial crisis.

During 2008 and 2009, overleveraged companies, particularly financial institutions, were forced to issue equity to shore up their balance sheets. That led to “one of the largest waves of equity new issue activity in Canadian history,” said Peter Miller, co-head of equity capital markets at BMO Capital Markets.

“While balance sheets coming into this crisis were generally in good shape, the sharp and deep economic downturn will impact most issuers’ liquidity and balance sheets. It is fair to assume many will need to shore up their capital with additional equity,” Mr. Miller said.

So far, the only signs of life for equity underwriting have been small mining deals. But there is still interest from institutional investors for a broader range of deals, said Tyler Swan, managing director and head of execution for CIBC World Markets’ equity capital markets division.

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"We have a pretty consistent dialogue with the sources of capital ... and they will have the funds to deploy for the right companies in the months ahead,” Mr. Swan said.

Things are even slower for mergers and acquisitions. The value of M&A involving Canadian companies in the quarter was down nearly 60 per cent year over year.

“Cash is king right now, so sending a whole bunch of cash out the door is probably not the right move,” said Stephen Kelly, national head of business law at Norton Rose Fulbright Canada LLP.

“But if you’re a well-capitalized company that has a good underlying business, I think you’re going to emerge from this pretty quickly and that’s where you’re going to start to see a lot of opportunistic M&A happening,” Mr. Kelly said.

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