Total equity financings reached near-record levels in the second quarter of calendar 2006, but activity was hampered by market corrections, says a report released last month by the Investment Industry Association of Canada.
The report, entitled Trouble in Paradise, points out that total equity issuance in Canada reached a whopping $13.9 billion in the second quarter, an increase of 11.5% over the previous quarter and 27.2% more than the same quarter a year earlier. But, the “paradise” of strong financings was troubled by the quarter’s market volatility and a decline in commodity prices.
“The message I was bringing home is that there was some weakness, some slowing down that the bottom-line figures may not convey,” says the report’s author, Sherry Hum, financial analyst, capital markets, at the IIAC in Toronto. That slowdown occurred in the traditionally dominant resources sector, in which financings edged up by just 3.2% to $4.8 billion.
“In the quarter as a whole, activity remained robust overall — particularly in common equity financings,” Hum says. “We’ve had a lot of issues in sectors other than the tra-ditional resources-based sectors, so that helped shore up the slowdown in the resources financings.”
Financial and real estate financings shot up 532.8% to $2.4 billion from the previous quarter, and by 423% year-over-year.
Income trust financings fell to $3.2 billion in the second quarter, down 19% from the first quarter and a 43.7% drop year-over-year. “We’ve had a levelling off from the peak of last year’s trust mania,” Hum says.
The trust market in the quarter was split almost equally between IPOs and secondary offerings, the report says. IPO trust financings totalled $1.7 billion, down 1.3% quarter-over-quarter and 20.6% year-over-year. Secondary issues totalled $1.5 billion, a drop of 0.8% for the quarter and 47.9% year-over-year. Private trust placements totalled just $13.2 million, for two issues, compared with an average of 10 private placements worth $337 million a quarter in 2005.
The market correction in the second quarter — which was caused by investor jitters over falling commodity prices, rising interest rates and growing valuation concerns — brought a 460-point drop in the S&P/TSX composite index in May and a 3.5% drop in the index in the second quarter. The S&P/TSX energy index fared better, with a drop of 0.4% in the second quarter.
The report sounds a positive note for the third quarter, which is off to a better start. Energy and metal prices are recovering, and the Middle East crisis, combined with the coming hurricane season, could push oil prices to new record highs.
The recent stock market uptrend also bodes well. The S&P/TSX’s 1.9% rise in July was its first monthly increase since April. As for interest rates, the report says, a “more contained inflation outlook” suggests the Bank of Canada will stand pat.
“I’m certainly optimistic for the third quarter for some of the figures that are coming in,” Hum says, “at least, for the stock market and for the rebound in commodity prices.” IE
Equity financings increase in Q2
Volatility and declining prices slow down resources sector financings
- By: Grant McIntyre
- August 30, 2006 August 30, 2006
- 11:04