The first casualties of Ottawa’s move to change the taxation of income trusts were those older Canadians who were relying on the trusts for retirement income. The second — and much less sympathetic — group were investment bankers, who saw a big source of revenue dry up when the market for initial public offerings hit a wall in late October 2006.

The IPO market was humming until Halloween rolled around and the surprise income trust announcement brought much of the new-issue business to a screeching halt. The fact is, in the past decade, income trusts have come to dominate the IPO market, accounting for 50%-66% of deal volume.

By promising to eliminate the incentive to structure a company as an income trust, the government killed a large part of the IPO market. Public companies that were planning to convert to a trust structure scrapped their plans, as did firms contemplating IPOs as trusts. Moreover, the move knocked down the overall market, making it much less appealing for companies to launch traditional common-equity IPOs.

As a result, the un-derwriting commissions that brokerage firms generate from the deals took a thumping, as well. Estimated total IPO underwriting commissions on both the Toronto Stock Exchange and the TSX Venture Exchange dropped by more than 20% from 2005 to 2006. The commissions earned on non-traditional IPO vehicles (traditional IPO offerings are common-share issues) were the biggest reason for the slump, with those commissions off by more than 40% year-over-year.

Investment Executive estimates the commissions generated by IPO underwritings on a deal-by-deal basis using the bonus credit method — applying the commission rate quoted in each deal’s prospectus to the total value of the deal, and dividing it among the listed underwriters. All firms in an underwriting syndicate are assumed to get an equal share of the deal, except for the lead underwriter, which gets a double share. Our research includes all issues the TSX considers IPOs, both on the TSX and TSXV, including trusts, income funds, split shares and other vehicles beyond the traditional common-stock IPO.

In terms of the deal flow on the TSX and TSXV, there were almost 270 deals in 2006 that generated more than $11.1 billion of new capital combined. That’s down from the prior year, when there were some 140 deals that generated almost $14.6 billion in new capital. The TSX alone saw about 107 deals in 2006 (including multiple classes of certain issues, which IE counts separately) that raised $10.5 billion, while the TSXV raised $620 million.

From the perspective of both deal activity and commission volume, it’s clear 2006 represented a notable drop from the prior year, and the proposed shift in income trust taxation policy was a big reason for the slump. There was almost no IPO activity in the fourth quarter, and there has been very little so far this year. The change can be traced directly to the trust taxation decision, which not only undermines that specific type of deal, but also has spilled over into the traditional IPO market by creating uncertainty for companies contemplating traditional equity financing.

Nevertheless, investment dealers did manage to rake in hundreds of millions of dollars in IPO underwriting commissions in 2006 in deals launched on the TSX and TSXV. IE’s methodology shows the top IPO underwriter for the year was CIBC World Markets Inc., which nosed out RBC Dominion Securities Inc. for first place.

Between them, CIBC and DS formed the top tier in the IPO underwriting business in 2006. Their strength came largely from their ability to secure lead underwriter assignments on most of the biggest deals that took place. CIBC had the lead position on 34 offerings, while DS had 19 (including multiple classes of several issues). None of the other bank-owned firms managed even 10 lead underwriting spots.

There’s a bit of a drop-off to third and fourth place, which are claimed by TD Securities Inc. and Canaccord Capital Inc. , respectively, with BMO Nesbitt Burns Inc. and Scotia Capital Inc. in a very close race for fifth and sixth spots.

Canaccord was able to muscle in among the bank-owned dealers on the strength of its franchise in the venture market. It’s a place in which few of the bank-owned dealers dare to tread, and only one (CIBC) ranks among the Top 10 underwriters in the area.

@page_break@As for the bank-owned firms, 2006’s rankings represent a bit of a shift from 2005, when CIBC still held the top spot, albeit with a wider margin over the second-place firm, Nesbitt. DS was a relatively distant third. The shakeup at the top of the underwriter league tables reflects the trickle-down effect of the changing tide in the IPO market, caused by the weakening influence of non-traditional deals.

CIBC has been the leading IPO underwriter in recent years by virtue of its pre-eminence in the income trust area. If you look just at non-traditional IPOs underwritten in the past few years, CIBC is the unquestioned leader.

In 2005, it was far and away the top underwriter of such transactions, with the other bank-owned dealers clustered in a second tier — Nesbitt, Scotia, TD and DS, respectively. Again in 2006, CIBC was clearly the top banker for non-traditional IPOs, with the other four forming a second tier once again. But this time the order was reversed, with DS in second place, followed by TD, Scotia and Nesbitt.

In 2006, however, the total commission dollars available on such deals was down substantially from 2005, diminishing their significance within the overall IPO market. At the same time, there was a bit of a resurgence in traditional IPOs, even before the income trust deals were effectively scuttled. The total commission dollars available on the traditional type of deals more than doubled from 2005, so success in the traditional side of the market became more of a factor.

In 2005, there were more than 100 non-traditional IPOs, which raised $12.6 billion in capital. In 2006, both the number of deals and the total value raised was down, to 61 deals generating $6.7 billion in capital. Moreover, the average underwriting commission on these deals fell to 4.95% in 2006 from 5.29% in 2005.

At the same time, the amount of traditional IPO capital raised more than doubled, to $3.9 billion in 2006 from about $1.8 billion in 2005, plus a further $620 million that was raised on the TSXV. The average underwriting commission in 2006 also slipped a little on the transactions, to 6.1% from 6.3% in 2005.

Looking at the traditional IPO market in 2006, DS ranks as the top underwriter. CIBC takes second place, followed by TD and Canaccord. DS grabbed top spot by taking the lead underwriter title on a variety of old-school equity deals, finding capital for a mix of firms, from resources companies to financials.

Canaccord ranks so highly in both the overall league tables and traditional IPO rankings, in part because it is also the top underwriter for venture deals. In 2006, it led the way among TSXV underwriters, followed by Blackmont Capital Inc., GMP Securities LP, Raymond James Ltd. and Haywood Securities Inc.

As with the senior market deals, the key to Canaccord’s success was leading a lot of transactions. Indeed, it led the most deals overall last year, when both TSX and TSXV deals are considered, not even counting Canaccord’s underwriting business on London’s Alternative Investment Market, in which it is also a big player.

Although no one is likely to cry much for a bunch of well-fed investment bankers, the fact is that the unexpected death sentence handed down on the income trust market had a big impact on their bread-and-butter business in 2006. Its disappearance is likely to present an even bigger challenge for them in the year ahead. IE