EQUIPO NIZKOR |
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28may10
World's investment banks checked by debt crisis
Europe's government-debt crisis has choked off a 14-month surge in sales of new bonds and shares, while mergers and acquisitions (M&A) are at a nine-month low, according to Thomson Reuters data.
The drop-off in capital markets and M&A activity is bad news for companies seeking to raise new funds or sell unwanted units; for buyout houses and entrepreneurs eager to cash in by bringing private firms to market; and for banks, such as JPMorgan (JPM.N), which raked in record investment-banking fees in 2009.
The preliminary data, released on Friday, showed:
* Global debt capital markets (DCM) activity fell 58 percent from April, to hit $210 billion, the lowest since October 2008, the month after Lehman Brothers collapsed
* Global equity capital markets (ECM) activity halved from April to hit $30.6 billion, the lowest since February 2009
* Global M&A this year is 22 percent ahead of last year's total, at $862.7 billion, but May has been the slowest month since last August, with $145 billion of announced deals
"Call it post-traumatic stress disorder from 2008," said Michael Tory, the former Lehman Brothers banker who founded Ondra Partners, a London-based boutique.
"The banking crisis, because it was so severe, morphed into a sovereign crisis as recessions hit public finances. Now risk aversion has increased across the board as investors have lost confidence. I don't think it's as bad as 2008, but it shows we're not out of the woods yet."
Greece's debt problems, crystallized by an April 27 downgrade to "junk" by Standard & Poor's, have sparked intense scrutiny of Europe's public finances. Investors are concerned fiscal-austerity measures might kill Europe's nascent economic recovery and also worry about sweeping financial-reform plans.
Since peaking in mid-April, world stocks have fallen about 12 percent, measures of U.S. equity volatility and European banks' credit risk have doubled, and inter-bank lending rates have jumped.
"Maximum Uncertainty"
Some deals and capital-raisings have been scrapped. Mirion Technologies, NewPage Group Inc and Smile Brands Group Inc all pulled U.S. initial public offerings (IPOs) this week, while Allegiant Travel Co withdrew a $250 million junk-bond sale.
On Thursday a trio of investors dropped plans to make an unsolicited bid for Britain's only listed ports company, Forth Ports Plc (FPT.L), citing "economic uncertainty."
The data for May showed European ECM activity plunged 82 percent to $2.7 billion, while debt issuance also collapsed. In M&A, Europe's share of global deals is 24 percent, well below its historical average.
"Europe is the area of maximum uncertainty at the moment. That's likely to defer any significant recovery in the M&A market, and to make capital-raising harder," said Mark Aedy, head of investment banking for Europe, the Middle East and Africa (EMEA) at Moelis & Co.
Aedy said M&A was likely to remain subdued for longer than anticipated at the start of 2010, but Europe's difficulties could lead to a "very significant" rise in restructuring work, involving states, banks, and struggling corporations.
Nevertheless, many companies have already refinanced and are enjoying improving earnings. Enormous demand from investors keen to boost meager returns should also help future debt and share issues when market turbulence calms.
"Notwithstanding the current volatility, markets are open -- they are more challenging, but they are open. Liquidity is there, and a number of transactions can get done," said Francois-Xavier de Mallmann, head of Goldman Sachs's European financing group.
"We expect a pick-up in new-issue volume across both credit and equity market as soon as market conditions stabilize and volatility comes down."
Earnings Downgrade?
For investment banks, the pullback spells a drop in fees: Freeman & Co estimates DCM fees are at their lowest since December 2008, and M&A fees are at a 12-month low.
In a note this week, Nomura analyst Jon Peace said if market weakness persisted, he would probably cut his forecasts for banks exposed to capital markets at the end of the quarter.
Peace says a 10 percent fall in second-quarter investment banking revenues would cut earnings per share by an average 3 percent at the banks Nomura covers: Credit Suisse (CSGN.VX), Goldman Sachs (GS.N), Morgan Stanley (MS.N), UBS (UBSN.VX), Barclays (BARC.L) and Deutsche Bank (DBKGn.DE).
Still, this could prove insignificant relative to wider changes confronting the industry. JPMorgan analyst Kian Abouhossein estimates reforms currently being considered could slash sector returns on equity to 11 percent from 19.
[Source: By Quentin Webb, Reuters, London, 28May10]
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