Big equity sales bring big payday for the Street

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Underwriters are looking to clear a nine-figure bounty of fees following a spate of big Canadian equity offerings in the past week.

The bulk of the fees come from three large bought deals last week: There was a $750-million subscription receipt offering from Bombardier Inc. that was upsized thanks to strong demand to $937.5 million (and could top $1.07-billion if the underwriters exercise their overallotment option); a $650-million subordinated voting share offering from Fairfax Financial Holdings Ltd. (plus a separate $200-million preferred share deal); and the biggest fish of all, Cenovus Energy Inc.'s massive $1.5-billion equity offering. Finally, on Monday, TransCanada Corp. sold $250-million worth of preferred shares in an offering announced Monday, led by Scotia Capital Inc. and RBC Dominion Securities Inc.

For those keeping score, that's a combined $3.5-billion-plus in equity issued, with big fees attached to each for the underwriters: four per cent of gross proceeds for each of the Bombardier and Fairfax common stock offerings; 3.5 per cent on the Cenovus deal; and likely somewhere between one and three per cent on the preferred share offerings.

Because the offerings were sold by way of bought deals, where the underwriters bought the shares from the issuers and took on the task of reselling them, the issuers got the money they need up front and the investment banks absorbed the risk. To help unload the shares, the underwriters typically offer a price discount to lure buyers. Bombardier's deal, for instance, was priced at a steep 10 per cent discount to the market.

The big question last week was whether the underwriters on the Cenovus deal – a staggering 20 of them, headed by deal co-leads RBC and TD Securities Inc. – would have to eat into their fees to finish re-selling the stock they bought. But the bankers were able to get the deal finished late Friday as the shares climbed higher to end the week.

Sources tell Streetwise a significant amount of stock went to retail investors – the final split isn't yet known – so that investment banks likely won't collect the full amount of their 3.5 per cent commission, or $52.5-million. That's because whenever stock is placed with retail investors, brokers typically take half the underwriting fee, in the form of a "selling concession," for each share they sell. Given the flurry of deal activity, it shouldn't hurt the bankers too much.