Investment Banks Jostle to Win the European Recovery Race

Global Capital Markets Forecast Monthly Series (3 of 3) – Europe

The coronavirus pandemic has created an atmosphere of uncertainty, leaving many corporates questioning the viability of planned investments. Europe has been one of the hardest hit markets, especially Italy, Spain, Germany, France and the United Kingdom (UK) where the virus wreaked the most damage. Equity markets have fallen by 38 percent with airlines, cruise operators, restaurants, cinemas, hotels, gyms and retailers bearing the brunt of the fallout.

“The EU is responding quickly to help cushion the blow and to help small and medium-sized companies, which are especially vulnerable” – Valdis Dombrovskis, European Commission Executive Vice President

A key stumbling block for the European economy is the inefficient usage of single market customs union benefits. Regional growth has principally been driven by middle market corporates seeking to expand business operations across the region and become Europe’s leading multinationals, highly dependent upon robust capital markets to finance business expansion.

The European Union’s (EU) decision to develop the Capital Markets Union (CMU) was a step in the right direction to deepen capital markets integration between EU member states. New funding resources would be available for lower corporates coupled with improved access to cross-border mergers and acquisitions (M&A) for corporates expressing international expansion ambitions beyond Europe. The move arguably brought about a more stable, resilient and competitive financial system for the EU.

Brexit has also been a major challenge. The high level of capital market interdependence between the UK and EU has meant the UK’s departure from the union has severely disrupted financial markets. As mutually important trading partners, the UK and EU’s vast investment flows are closely intertwined. Investment banks in the UK who agent investment deals and transactions for corporates in the EU now face additional barriers managing capital flows in the region.

Investment Banking Slow Down

In the year to date (YTD), deal values currently stand at US$664 billion for debt capital markets (DCM) across the UK, France and Germany with syndicated lending at US$272 billion according to data from Dealogic. Low interest rates set by European governments have been one of many attempts to stimulate growth and investments with minimal default risks. However, the European economy may find itself in a liquidity trap if a greater number of companies prefer to hold cash rather than debt.

Recent data from Dealogic shows that equity capital markets (ECM) have been sluggish, accumulating US$273 billion in deal values to date throughout the top three European economies – UK, France and Germany. While equity capital raisings across Asia and Australia were executed at significant discounts, US corporates instead preferred greater debt and are now charting a path to recovery without diluting shareholders. As the crisis began to unfold it appeared corporates carrying a high debt load were particularly vulnerable to stalled revenue, inventory pileups and supply chain issues. Yet the most highly leveraged firms have already made up ground lost during the crisis, eliciting controversial early calls for a successful ‘V’ shaped recovery.

Indecisiveness is exacerbating the slowdown in investment banking (IB) activity throughout Europe. Many banking clients are in the dark as to whether they should raise additional finance to fund investments through debt or equity, or even if they should raise finance all together. As a result, investment banking profitability has nosedived. BNP Paribas, Deutsche Bank, Goldman Sachs and other global heavy weights have suffered profit downgrades since Q1 2020, despite the Top 300 corporates by revenue across Europe nominating all three brands prominently as ‘the’ provider for capital markets solutions in terms of first name brand recall according to new East & Partners and Dealogic research.

East & Partners and Dealogic have jointly collaborated to generate data-based insights into planned IB spend in the next 12 months on a biannual basis. Forecasts gathered in the first half of 2020 show that 48.9 percent of corporates in the UK are unsure whether they will raise debt finance in the coming year. A similar outcome was recorded for the Top 100 German enterprises by revenue with 46.8 percent of CFOs expressing concern over whether debt is the preferred option for financing, not to mention an even larger proportion of corporates in France (57.4 percent) who also find themselves in the ‘unsure’ category.

Looking at ECM, there are also a significant proportion of corporates who were unsure. In the UK and France, 43.6 percent and 47.9 percent of corporates respectively stated that they were unsure whether they would increase equity in the coming year compared to relatively fewer German corporates in the same position (35.1 percent). The figures pre-date the astounding recovery in share bourses across the globe through May and June, casting a new light on dilutive capital raisings and adding considerable intrigue to the next round of
Deal Makers: The IB Forecast featuring top client bank selection findings.

Corporate Finance Raising - Next 12 Months
% of Corporates Unsure

Source: East & Partners and Dealogic, Deal Makers - The IB Forecast (N: 748)


Planned M&A: Opportunities and Threats

At the start of 2020, M&A markets were humming along strongly. M&A transactions were underpinned by high equity prices, record low rates and overall buoyant financing conditions. CFOs and corporate treasurers in Europe were still in pursuit of high value M&A deals with a strong expectation of capitalising on domestic and cross-border market growth. YTD M&A volume has reached US$187 billion across the UK, Germany and France according to data from Dealogic.

However, as the year has progressed, M&A activity has begun to also slowdown and could potentially remain in this slowing stage throughout the rest of 2020 if market confidence and corporate valuations fail to progressively pick up.

Although these market conditions will remain in place for the foreseeable future as the threat of a ‘second wave’ of COVID-19 infections fails to subside, some European sector verticals display robust appetite towards cross border M&A. Industrials, Technology, Communication, Entertainment and Media are amongst the few who are foregoing plans for cross border M&A deals on the buy side.

Investment banks must now play a critical role in helping clients assess whether to pick up on delayed M&A deals and if the legal terms of these deals remain viable.

What Next for European Investment Banking?

European investment banks will face industry challenges, uncertainty, regulatory changes and disruption in the short term. Will DCM pave the way for industry growth as economies face recession?

Has ECM taken a turn for the worst due to falling stock market valuations?

Will M&A deals be an effective business expansion tool given the advantage of low value stocks?

Markets would typically be expected to chart a course of mean reversion however only time will tell how they will cope in the future as central bank stimulus expands sovereign balance sheets to unforeseen levels.

Is the current market dynamic sustainable and will CFOs turn to their current advisors or ‘churn’ in the search of post-crisis capital markets expertise?

This concludes East & Partners third and final Research Note in the Capital Markets Forecast series. East & Partners and Dealogic will continue to monitor ECM, DCM and M&A activity on a biannual basis for ‘Deal Makers: The IB Forecast’, examining corporate’s expected investment banking spend, key capital raising drivers, and investment banks that are front of mind for corporates investment banking services.


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