September stock sale deluge drives hopes that Canada’s capital markets are bouncing back

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Rain is finally falling on Canada’s drought-stricken equity markets.

Over less than one week after Labour Day, the amount of money raised by Canadian companies through stock sales rivalled the total for the first six months of the year. Led by a blockbuster $4.6-billion bought deal from Enbridge Inc. ENB-T, financings from Peyto Exploration & Development Corp. PEY-T, Intact Financial Corp. IFC-T, DRI Healthcare Trust DHT-UN-T and a half-dozen other companies pushed the total for the first full week of September past $5.5-billion.

Compare that to the $5.9-billion raised by Canadian corporate stock sales from early January through the end of June.

The flurry of post-Labour Day activity alone is not what has Bay Street deal makers optimistic that the recent deluge of deals will translate into a sustained downpour. Companies working on deals through the summer often wait until after Labour Day to launch them.

That most of the post-Labour Day deals were fully oversubscribed – meaning investor demand to buy all those new shares significantly outstripped expectations – has bankers buying (metaphorical) umbrellas. The Enbridge deal was originally supposed to be $4-billion, but another $600-million worth of shares was added three days after the financing launched to accommodate the stronger investor appetite.

The same thing happened to Peyto and Intact when they announced bought deals worth $125-million and $500-million, respectively. Peyto ended up offering another $50-million worth of shares and Intact upped its own deal by $75-million.

“Whether or not this is just a one-week phenomenon and then things get quiet again, we do think sentiment has improved and we will see a higher level of issuance activity,” Tyler Swan, managing director and global head of equity capital markets for the Canadian Imperial Bank of Commerce, said in an interview. “The glass is certainly more half full than half empty now.”

Debt markets, though never as diminished as equity markets, have also come “screaming back to life,” said Nitin Babbar, global co-head of equity capital markets for RBC Capital Markets.

“What we are seeing is health in credit markets where the new normal is a higher rate, but companies are financing there, so that is working, that is liquid and healthy,” he said.

Amid the flurry of equity deals announced last week, Montreal-based Boralex Inc. BLX-T secured a $608-million loan from a syndicate of banks led by Desjardins Group to build the Apuiat wind farm on Quebec’s North Shore.

The market overall has been climbing from May onward, Mr. Babbar said, to the point where it recently hit “a level where people felt comfortable in the stability.”

“We have been in tough markets as rates have been rising,” he said. “We are still vacillating between are rates going up a bit more or have we ended that cycle, but we are nevertheless closer to the end than we were a year ago and that goes to why investors feel more comfortable putting risk on their books.”

Mr. Swan said issuance levels are “getting back to more normalized levels after a fairly slow 18 months,” when the value of new stock sales plummeted to lows not seen since the 1990s. Given just how far issuance levels have fallen, Rob Peterman warns that a rebound will likely take longer to materialize than many investors might expect.

“From 2017 through 2021, for that five-year period, Canadian markets very consistently raised on average around $47-billion in terms of equity capital raises,” Mr. Peterman, vice-president of global business development for Toronto Stock Exchange owner TMX Group Inc., said in an interview. “We get to 2022 and the total equity capital raised was $27-billion, almost half of what would be a normal year and this year is tracking to something like that or even worse.

“The context is it is definitely down a lot from what we would think of as a normal range,” he said, “but talking about what is happening right now, there are definitely signs of momentum.”

Much of that momentum stems from a growing confidence among investors that the economy is headed toward a soft landing, in which higher interest rates slow economic growth enough to reduce inflation, but stop short of making the economy shrink.

“Certainly there is still some uncertainty left, but sentiment is now reflecting the fact that there is maybe a little period of economic weakness but for the most part corporate earnings are going to be reasonably strong,” Mr. Swan said. “And at some point people are going to be looking through to interest rates coming down, and the inflation fight is over, and a real bounce in economic activity.”

Key to convincing investors to look beyond present circumstances is the revival of Canada’s utterly moribund market for initial public offerings. Last month, researchers at Bank of Nova Scotia identified glimmers of hope that, after most of the companies that rushed to public markets during the boom of 2021 massively underperformed the broader market, more recent IPOs were showing strength.

Those glimmers grew over the past week when British chipmaker Arm Holdings Ltd. jumped nearly 25 per cent in its Nasdaq debut on Thursday. The next day, according to a regulatory filing, grocery delivery company Instacart increased the price range of its own upcoming IPO.

Several other high-profile companies, such as data provider Klaviyo Inc. and famed German sandal maker Birkenstock Holding Ltd., also have IPOs set to launch in the United States this month.

“The pipeline of IPOs is moving quite well in the U.S. market and it is a barometer that many look to in terms of stability of capital formation in equity capital markets,” Mr. Babbar said, “so I do share the enthusiasm.”

Mr. Peterman said “it is probably too late in the year to be overly hopeful that Canadian markets will roar back to a more normal range,” but “we should be optimistic about the capital raising that is happening now suggesting 2024 will be off to a better start.”