A surprising flurry of share sales has opened the floodgates for Canadian companies yearning to raise cash, marking the end of a financing drought and reversing the fortunes for Bay Street underwriters behind these deals.
What started with a run-of-the-mill preferred share offering from Pembina Pipeline Corp. has morphed into a share sale bonanza, with $4.6-billion raised since last Monday. Late Wednesday Emera Inc. extended the wild run, announcing a new deal to raise $700-million by selling new common shares.
The recent spate of deals was originally driven by pipeline financings, but it has since spread to other sectors, including real estate and financial services. In the last week new financings have come from the likes of Exchange Income Corp. and Fiera Capital Corp.
A number of these deals have drawn institutional investors, particularly Enbridge's $1.5-billion private placement of common shares, but the offerings are largely driven by retail investor demand -- which is why many have come in the form of preferred shares or convertible debentures. Both of these securities carry lucrative yields.
The recent appetite for new financings caps a roller coaster year. Early in 2017 Canadian companies extended their hot streak for equity offerings with billion-dollar deals from firms such as Cenvous Energy Inc. and AltasGas Ltd., extending a trend that dated back to 2015. Both companies were funding acquisitions, for WGL Holdings and ConocoPhillips' oil sands assets, respectively, and investors were willing to help finance such large deals, the way they did for TransCanada Corp in 2016.
By July, investor appetite severely waned. Some issuers took too much advantage of hot share prices and tried to finance at frothy valuations. Meanwhile, some buyers were starting to get burned for participating in big deals. Both Cenovus's and AltaGas's share prices have slid this year, and are now down 24 per cent and 6 per cent from their offering prices, respectively. HudBay raisesd $242-million in September, but those who bought shares in the offering are currently down 12 per cent on their purchase.
As of October 31, equity financings in Canada had fallen 16 per cent from same period in 2016 – an unusual predicament considering the S&P/TSX Composite Index ended October above 16,000. Hot markets usually spur a spate of deals.
The drop in total financings hurt underwriting profits at investment banks, but sources familiar with the deals said Bay Street's bottom line was likely hit even more severely because a number of deals struggled to sell. When financings launch to little investor fanfare, they are sometimes re-priced to a lower level to entice buyers, which can wipe out underwriting profits or occasionally even cause a loss.
Such a situation played out with Hydro One's $2.8-billion share sale in May. Investors intially balked at the sale, leaving as much as half of it unsold. Underwriters later re-priced the deal to unload the remaining shares on their books, all but wiping out their profits on the second largest Canadian deal this year.
Hot markets have helped to reverse their fortunes. The TSX Composite Index is up 7 per cent from its recent low in early September and retail investors are back to buying mostly yield-oriented securities and companies.
Rising markets also tend to spur new initial public offerings, and investment bankers say the pipeline for IPOs in early 2018 is building. However, they caution that this still isn't a market where absolutely anything will sell. While some recent IPOs have performed well, including deals from Canada Goose Holdings Inc. and Jamieson Wellness Inc., others from Freshii Inc. and Roots Corp. have struggled.