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RBC’s Gavelin sees ‘robust’ IPO market continuing

A RBC logo is displayed outside a branch in Toronto, in this file photo.

NORM BETTS/BLOOMBERG NEWS

Near-record low levels of volatility have been a boon for stock sales globally this year, but geopolitical tensions are putting that trend under threat.

After an extended period of calm, the CBOE Market Volatility Index, or VIX, which measures stock market volatility, has ticked higher over the past week, partly based on the fear of North Korea and the United States engaging in a catastrophic military conflict.

Late last week, U.S. President Donald Trump tweeted that "military solutions are now fully in place, locked and loaded, should North Korea act unwisely."

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"The headline is obviously North Korea, and what's happening with the U.S., so that's never too positive for the market or volatility," Kirby Gavelin, head of equity capital markets in Canada at RBC Dominion Securities Inc., said in an interview.

For investment banks, volatility is a double-edged sword. When it's low, as it has been for most of the year, volatility can be detrimental to trading revenue, as investors don't feel the need to sell into a panicked market, for example.

Instead they are more likely to hold on to their positions. For that reason, most of Canada's major banks saw a dip in trading revenues in the second quarter. However, that same low volatility creates a favourable environment for public companies which can come to market with large stock issues that they are selling into a stable market.

The relatively calm conditions have worked especially in favour of Canadian large-capitalization companies, which have tapped the market on a number of occasions with Whopper-sized equity issues.

Hydro One Ltd. has sold in excess of $4-billion in securities this year. In May, the province did a secondary offering of $2.8-billion in common shares, as Ontario sold down more of its stake, and in July, as part of its announced takeover of U.S.-based Avista Corp., the utility sold $1.4-billion in convertible debentures.

"Lower volatility does create opportunity for larger market transactions," said Mr. Gavelin.

Other sizable secondary offerings announced this year, include Calgary-based AltaGas Ltd., which raised $2.2-billion in January, and Cenovus Energy Ltd., also of Calgary, which sold $3-billion worth of securities in March.

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Lower volatility has also helped reinvigorate the Canadian initial public offering (IPO) market after a woeful 2016. Since IPOs are marketed offerings that take weeks (at least) for bankers to build a book, price and list, periods of calm are needed to ensure a smooth landing. This year, Canadian issuers have raised about $3.3-billion in IPOs, versus a mere $600-million for the whole of 2016.

Despite volatility resurfacing in the global marketplace, Mr. Gavelin is bullish on the Canadian IPO pipeline for the remainder of 2017 and the first half of 2018, saying he expects a "robust" market.

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