Frank Aldridge
Soon after the Covid lockdown was eased, two sale and purchase agreements worth $1.6 billion were completed. It showed the capital markets in New Zealand still had plenty of energy.
ANZ Bank sold UDC Finance, established in 1937, to Japanese Shinsei Bank for $762 million in a the deal subject to Overseas Investment Office (OIO) approval.
The sale will release more than $2 billion of funding provided by ANZ to UDC and strengthen the local bank's balance sheet.
Earlier, electricity distributors WEL Networks and Waipa Networks sold their combined 100 per cent shareholding in Hamilton-based Ultrafast Fibre to Australian fund manager First Sentier Investors (formerly Colonial First State Global Management) for $854m.
A payment of $200m to WEL Networks is deferred for 18 months from completion of the agreement, which is also subject to OIO approval. Craigs Investment Partners was the investment banking adviser.
Jonathan Wilde, Craigs' director of investment banking, said "as we continue to emerge from the pandemic, it is clear that buyers have emerged out of the gates faster than sellers.
"In particular, financial sponsors have begun to switch attention from ensuring their portfolio companies were best positioned to manage through Covid-19 to looking for opportunities to deploy dry powder."
He said when New Zealand went into lockdown, the mergers and acquisitions market was significantly impacted. There were numerous deals being pulled or put on hold — not necessarily because the target's financial performance had been affected but the implications of increased uncertainty on bidder risk-appetite, challenges in arranging funding and travel restrictions to meet management and undertake due diligence.
"We saw material adverse change clauses being invoked, sometime contentiously, in a number of high-profile listed deals."
Wilde said Craigs advised on a couple of scale transactions signed shortly after New Zealand came out of level 4, reflecting that global capital — equity and debt — was still available for investment here.
"Our reputation as an attractive destination for capital seems to have been enhanced by the country's success rate to date in responding to Covid-19."
He said if the economy rebounds and volatility subsides, the underlying dynamic of available capital from financial sponsors and corporate (both domestic and offshore) and the appetite for quality assets should support a recovery in mergers and acquisitions activity into 2021.
Jeremy Williamson, a director of investment banking at Craigs, said it was pleasing to see the numerous capital raisings in the Covid-19 environment extremely well supported. NZX listed companies have so far raised more than $2.5b in new equity. The support was due to the:
● Record levels of cash sitting available for listed companies.
● Conservative approaches to the level of capital required to be raised, based on worst case scenario.
● Timely responses by regulatory bodies in providing flexibility for capital raisings, such as increasing the placement threshold from 15 to 25 per cent of the company's capital value; lifting the share purchase plan threshold to $50,000 per shareholder; and permitting issuers to undertake accelerated non-renounceable entitlement offers (ANREO).
●Appropriated discount levels reflecting the challenges of the Covid situation.
Williamson said the ANREO structure attracted a lot of attention as shareholders abandoning the offer were not given the opportunity to realise value for their rights.
"While this mechanism appears punitive for renouncing shareholders, it provided more certainty for listed issuers raising capital during this period of extreme market volatility.
"More traditional pro-rata structures, which deliver value back to renouncing shareholders through rights trading or shortfall bookbuilds, will quickly become the norm again as issuers turn to raising capital for growth rather than balance sheet repair.
"Increasingly, companies we are talking to are turning their minds to growth opportunities having weathered the Covid storm and we expect growth capital to be plentiful for those who come to the market," said Williamson.
On debt markets, investment banking director David McCallum said issuance to date has been limited to high-grade bonds such as Government, with a record $7b done in a single issue, Local Government Funding Agency and Housing New Zealand. Offshore issues of Kauri bonds, in New Zealand dollars, have also been strong.
He said some of this demand has undoubtedly been driven by a lack of supply from others, with no traditional corporate issuance completed since last year and only two bank issues in February.
So far this year domestic bond issuance was $3.5b compared with more than $10b for all of last year. For debt securities, which retail investors were eligible, issuance was only $1b.
The lack of new issuance has meant that many balanced portfolios have bond allocations below where they should be, McCallum said.
"Now that secondary market margins are approaching pre-Covid levels, we expect to see some traditional corporate issuance emerge in the next month or two, as has been evident in the Australian market. We also expect to see good demand from investors, including retail, given the lack of supply."
Bonds reduce the volatility in investors' portfolio, and McCallum said a strong advantage of the New Zealand market is its ability to attract both retail and institutional investors. It is also fundamental to ensuring that New Zealand maintains a vibrant market given the small number of institutional investors.
He expects a flurry of issuance from the banks once the capital rules are finalised with the Reserve Bank. The delay in implementing the new rules has denied investors the opportunity of investing in higher-yielding capital instruments issued from the banking sector.
At the peak, capital instruments comprised nearly $5b of the domestic market and currently sits around $2b, and "would be significantly lower had the Reserve Bank not prevented banks from redeeming their capital instruments as expect on their call dates," McCallum said.
On equity markets, Craigs' head of international equities Geoff Zame said local institutions and fund managers have been very active adjusting portfolios as they made decisions not only on the economic outlook but also on individual stocks and the sectors they were exposed to.
Total value of shares traded on the NZX was up 52 per cent for the first six months of the year compared with the same period last year.
Zame said: "Clearly, travel, tourism and hospitality were hardest hit, while stocks exposed to healthcare and utilities have fared better. Offshore investors have continued to invest in the New Zealand market comforted by our handling of the health crisis."
Zame said the investors were attracted to quality stocks such as The a2 Milk Company, Fisher and Paykel Healthcare and Ryman Healthcare and high-yielding ones like Spark New Zealand, Contact Energy and Genesis Energy.
He said global sharemarkets including New Zealand had staged a remarkable comeback since mid-March. The NZX has recovered its 32 per cent fall in February/March.
"After such a rapid recovery in equity prices, it is harder to see a significant upside in the short term. However, we still see rewarding opportunities in investing in quality companies that will navigate their way through these changing times."
Frank Aldridge, Craigs' chief executive, said capital markets have done their job by providing liquidity, and where needed companies have raised capital.
"Interest rates are so low and have left cash sitting on the sideline. Investors, both institutional and retail, have handled the (Covid) period pretty well. There's been no real panic as investors adjusted portfolios — people acted rationally.
"Over the period we had a lot of enquiry from new investors coming into the market. They have cash in the bank, the rates are so low and they have had time (during the lockdown) to consider new investments.
"We've seen an increase in offshore investing, particularly US technology stocks.
"At the same time, regulators have gone on the front foot and provided more flexibility such as increasing the threshold of what companies can raise. The capital markets and regulators have operated as they should," said Aldridge.
Nearly 30 per cent of the value of all trading volumes on the NZX is handled by Craigs.
Its market share and services were again recognised by the Euromoney magazine.
Craigs was named as the best investment bank in New Zealand in the Euromoney Awards for Excellence 2020. It was Craigs' fifth win in seven years.
Following the awards announcement, Craigs' chief executive investment banking Brett Shepherd, said unprecedented levels of capital and lower cost of capital requirements from purchasers, continued access to low cost and longer term debt through banks and capital markets, as well as strong equity markets, provide a robust platform for continued market activity.
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