UBS tops league tables in dismal first half dominated by few deals, layoffs and cost cuts

New Zealand-based Ryman Healthcare’s $824 million equity recapitalisation in February was the largest transaction to date in 2023, followed by an $800 million raise by Star Entertainment in March and a $774 million placement for infrastructure investor Infratil in June, the Dealogic data revealed.

The spike in deal volumes, however, could not rescue the dip in ECM fees, which fell 16 per cent to $US192 million this half, partially because of no IPOs, which pay bankers more per deal than other forms of capital raisings.

ECM fees still accounted for 20 per cent of Australian investment banking’s $US953 million revenue pool, the Dealogic data showed.

“The deals which have been done are probably towards the larger end. Deal count is a bit down on what we have seen historically. But what we typically see is a slight bias towards second half issuance,” said Matthew Beggs, UBS’ head of equity capital markets for Australia and New Zealand.

While most bankers concede activity will not trump 2021’s record numbers, they hope a higher-paying IPO will prop up the second half of the year. Chemicals company Redox’s $402 million IPO was the first off the mark, while non-deal roadshows have been completed for Virgin Airlines and Moly Cop, and Mondiale wrapped up its pre-deal meetings last week ahead of a possible $500 million listing, people familiar with the situation said.

Market sentiment, meanwhile, has improved from the lows of March when Silicon Valley Bank, Credit Suisse and Signature Bank collapsed. The Volatility Index (VIX) fell to 14 points this week from highs of 33 in October. This is the first time the VIX has fallen so low since the pandemic began, said David Lack, Bank of America’s head of equity syndicate for Australia.

“[The fall in the VIX] is very supportive for issuance. We are seeing this across the IPO pipeline, which finally has some signs of life,” Mr Lack said.

Redox’s IPO served as a bellwether of sorts for future deals as it signalled how much money investors were willing to part with, while the deal also helped discern a palatable value and risk appetite.

“Redox is a good indication of what investors will be willing to spend time on across the IPO cohort. Today’s IPO candidates need to not only be profitable, but have a track record of profitable growth,” Mr Lack said. He warned the IPO market would remain in “sharp focus”, with each listing “heavily scrutinised”.

“If there is a misstep in the bookbuild or pricing, which leads to a poor trading outcome, that will make processes more challenging. But I remain optimistic.”

Mergers in limbo

First half completed M&A fees nosedived to $US272 million from $US686 million.

M&A pay days remain in purgatory, with deals like Brookfield and EIG’s $18.2 billion takeover of Origin Energy still under regulatory scrutiny. So long as these deals are in limbo, bankers will not get paid.

Announced M&A also logged its lowest first half showing since 2020, as private equity appetite waned and negotiating parties haggled over valuations. Australian announced deals reached $US61 billion, down 24 per cent.

Some noticeable transactions include private equity firm Potentia Capital’s $562 million acquisition of Nitro Software and Mirvac’s $1.8 billion build-to-rent deal, both led by Jarden.

Metals and mining companies remain the North Star as commodity price increases prop up their value. Critical minerals businesses, in particular, are ripe for consolidation owing to the demand for lithium.

Gold miner Newmont’s $26.6 billion purchase of ASX-listed Newcrest from January is the biggest announcement this year. Lithium producers Allkem and Livent’s $15 billion tie-up illustrated consolidation in an industry in high demand off the popularity of electric vehicles.

“Mining is active. Management [has] a mandate from investors to grow for the right commodity, and they would rather buy companies versus build given the inflationary backdrop,” Mr Lack said.

“We have had a decade of underinvestment in the sector coupled with an only recent significant pivot to the battery minerals space. We expect M&A to be the way companies address those challenges.”

Mitigating risk

Similarly, in ECM, the best-performing sectors have been industrials companies and telecommunications utilities, Mr Beggs said. The first half of the year, investors flocked to safer, liquid companies to combat market volatility, which supported the market caps of resources companies.

Nickel Mines, for example, raised $673 million through an equity placement.

Rising rates have also meant convertible debt has become an important capital raising instrument. Companies looking to hedge outstanding debt against rising interest rates can issue debt-for-equity structured bonds, said Veronica Kaufman, an executive director in UBS’ ECM team.

“Corporates are thinking more laterally. [There is] increasing discussions around convertible bonds as a tool to manage interest rate risk and diversify funding sources,” she said.

ASX-listed property owner Centuria Industrial, for example, raised a $300 million convertible bond, The Australian Financial Review’s Street Talk reported in February. The bonds, maturing in 2028, helped it pay down existing debt.

“Structured solutions [like convertibles] become more relevant in uncertain times or as volatility picks up. The extent that things remain uncertain, the structured side becomes an alternative option to more traditional ECM,” Ms Kaufman said.