Investment Banking Racing Out of the Crisis

Global Capital Markets Forecast Monthly Series (1 of 3) - Australia

Within a single week, everything has changed. Capital markets are suffering a once in a lifetime blow from the devastating coronavirus pandemic. The demand side shock has wrought destruction on a scale never before seen in speed or scope across financial markets entering unchartered territory.

How much worse can it possibly get?

2.6 million infected and rising. 180,000 deceased. Financial markets in turmoil and the potential for the sharpest dual hits to production and unemployment in a century have conjured unpleasant reflections on 1930s Great Depression era austerity.

Economic activity has been brought to a grinding halt as revenue inconceivably spiralled to zero in unsuspecting sectors such as retail, tourism, education and transport. In Australia, many businesses are still reeling from the traumatic summer bush fire disaster. The health crisis has gutted investment, hollowed out business confidence and burdened increasingly indebted companies with substantial increases to liabilities without a guarantee of when conditions will improve.

“This virus will be with us a long time. Make no mistake,
we have a long way to go”
- Tedros Adhanom Ghebreyesus,
World Health Organisation (WHO) Director-General

Can past crises guide an effective strategic response?

Repositioning During Unprecedented Market Downturn Speed

Eleven percent of key decision makers see coronavirus as a risk to the survival of their firm, while a further 40 percent say the pandemic poses a severe threat according to recent YPO research based on interviews with over 3,500 CEOs across 109 countries. Two thirds of business leaders forecast a negative impact on earnings to continue for more than a year, while one in four expect their workforce to fall by more than 20 percent by Q1 2021.

Initial optimism in Q1 2020 that investment banking and advisory deal value would remain resilient have been downscaled as strong equity capital markets (ECM) and debt capital markets (DCM) issuance are offset by slowing merger and acquisition (M&A) activity, particularly cross border M&A. The likelihood of large deals proceeding in H2 2020 has evaporated, evidenced most notably by Canadian firm Couche-Tard’s stalled buyout of Caltex Australia, becoming the highest profile collateral damage of the coronavirus health crisis so far.

Data centre provider AirTrunk proves existing deal flow in the pipeline may well still be executed successfully, with Macquarie Infrastructure and Real Assets (MIRA) closing the deal for an 88 percent stake in the group, valuing the company at more than A$3 billion despite the Australian government’s limitations on Foreign Investor Review Board (FIRB) transactions. "Businesses are increasingly under pressure. There will likely be a rise in debt restructuring transactions for Australian businesses, along with opportunities to invest in distressed assets" the FIRB said in a statement.

Current State of Play

Up to A$7 billion worth of equity raisings in Australia since March have propped up investment banking revenues suffering from slumping merger and acquisition (M&A) fees. In ECM, Webjet’s failed bid to raise A$250 million and subsequent shift to a first of a kind ‘virtual syndicate deal’ with corresponding private equity (PE) proposals is a sign of the times – adaption and flexibility is key. Closely watched by the group’s lenders including ANZ, NAB and HSBC, brokers including Goldman Sachs, KKR, UBS and Bain managed to pull together an underwritten A$275 million deal buoyed by the ASX’s crucial change to listing rules.

The ASX now require companies that take advantage of temporary changes increasing the cap on share placement size from 15 percent of a company's share base to 25 percent to inform the market how they determine which investors receive allocations. They must also prove they operated on a best efforts basis to allocate shares pro-rata, preventing existing shareholders from being diluted. The ASX now requires companies to state whether their placement is related to COVID-19.

Expectations are that Australian deal volume into Q3 2020 will remain resilient as corporates review their balance sheets to withstand the COVID-19 enforced shut down for an as yet undefined period. In Q1 2020, deals withdrawn from the market increased 50 percent compared to Q1 2019, with 21 deals worth a combined US$6.8 billion taken off the table, primarily due to the coronavirus.

“We have not seen a crisis like this for over a hundred years,
and some household names will not survive” 
- Glenn Keys, Aspen Medical Executive Chairman

Debt issuance is ramping up however this does not suggest credit market risk is declining. Unlike in other market phases the surge in issuance reflects issuers pressing need to deepen liquidity during a period of time that may close out unexpectedly. Australian debt capital market (DCM) fees fell eleven percent and syndicated lending fees slid 43.5 percent year-on-year.

The preference for divestments is forecast to continue in 2020 as institutional enterprises reassess balance sheet resiliency. Global deal making has slowed to a crawl. No M&A deals worth more than US$1 billion were announced globally in a single week for the first time since 2004. The A$770 billion in M&A deals announced in the four months to April 2020 is the lowest level since 2013 according to Refinitiv, reflecting restrictions on investor roadshows and asset repricing as equity markets slide.

Past Crises Lessons

Comparisons are already being made with how markets responded to the 2007 Global Financial Crisis (GFC), despite sharply contrasting downturn triggers and outright rate of unwinding. East & Partners Institutional Banking research, based on direct interviews with 453 Top 500 Australian enterprises by revenue, recorded a pronounced shift in customer behaviour as credit markets seized in late 2007. 

Preceding the GFC, one in two corporates switched their corporate finance and advisory panel banked provider in line with a high level of bank pitching for new business. 54 percent of institutional enterprises reported an unsolicited approach for their business. By H1 2010 businesses had bunkered down, with 72 percent of firms ‘sitting tight’ while eight out of ten firms failed to record a competitive approach for their business.



Institutional Banking Customer Churn & Bank Competitive Pitching

% of Total

Source: East & Partners Australian Institutional Banking Program (N: 453)



What Next for Investment Banking?

It is clear that smaller sizes deals will become more prominent, particularly in relatively insulated industries that will see greater deal flow before harder hit sectors currently scrambling to recapitalise their balance sheets to ride out a prolonged period of uncertainty.

Ultimately investors will push major corporates in a strong position to take advantage of lucrative M&A opportunities stemming from falling equity prices as coronavirus crisis unfolds. Recovery efforts will underpin activity, evidenced by recent EY research confirming one in two CEOs globally (56 percent) are planning an acquisition in 2020 to position for the post-crisis recovery and long-term growth.

Voice of the customer analytics are crucial for guiding investment bank’s response to ride out the crisis, however long it may be. Are banks aware what are the most important factors influencing clients decision on which investment bank is selected to underwrite capital raisings? Who do corporates think of first as leading providers of capital markets solutions?

Tune in next month for East & Partners next Research Note in the Capital Markets Forecast series addressing how Asian investment banks are planning to navigate the coronavirus crisis through H2 2020 and beyond.

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