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Capital Markets Weekly: Major share flotations pulled but wider equity indicators remain constructive

19 July 2019 Brian Lawson

Overview

Equity markets show contradictory indicators: two major flotations, including the planned IPO for AB InBev's Asian business -slated as the largest IPO in 2019 - recently were withdrawn on price grounds, despite equity indices reaching new all-time highs and the US IPO calendar remaining sizeable. Bond markets remain positive, with Greece completing a seven-year benchmark sale at sharply-lower cost, along with successes for Ukraine's Naftogaz and Dubai's DP World.

Equity

AB Inbev postponed the planned flotation of its Asian business, slated as this year's largest IPO. This was the second major withdrawal in a week after Swiss Re pulled its flotation of its UK life business. AB Inbev had sought to place 1.6 billion shares to raise USD8.3 billion-USD9.8 billion equivalent, primarily to reduce its own debt. However, on 12 July, it stated it was not proceeding "at this time" citing "prevailing market conditions", and "will closely monitor market conditions".

The delay appeared price-driven. Market sources claim that major institutional investors were interested only at cheaper levels. According to Reuters, the planned pricing valued Budweiser APAC at 15.5-8.2 times its estimated 2020 cash-flow, versus 10.3 times for AB InBev itself and 14.1 times for China-focused Tsingtao (although this is a single and narrow measure of the company's prospects) .

Airtel Africa's shares also performed weakly. The IPO of Bharti Airtel's pan-African telecommunications unit was priced at 80p per share, bottom of the 80-100 p indicative range, raising GBP595 million. However, shares fell on 12 July in first-day trading to 67p (71.9p when writing).

Multiple other primary equity indicators are more encouraging:

  • The Renaissance Capital US IPO index has risen 41% within 2019 (to 12 July).
  • 10 US-based IPOs are slated this week, the second-most active deal calendar this year.
  • Genmab, a Copenhagen-based antibody treatment company, is seeking USD503 million, offering 27.8 million shares at USD18.11. This implies a fully-diluted valuation of USD11.8 billion, the largest market capitalization for a new US biotech listing in 20 years.
  • Electronic sport-streaming company DouYu is offering 67.4 million shares at USD11.5-14, potentially making this the largest Chinese share-raising in US markets this year.
  • The calendar also includes two Latin American issuers, Intercorp Financial Services (IFS), a banking and financial services group from Peru, and Brazilian medical education group Afya.

Emerging markets

On 12 July Naftogas raised EUR600 million of five-year Euro-denominated debt at 7.125%, and USD335 million of three-year dollar debt at 7.375%. The deal attracted demand from over 120 investors and was 2.5 times subscribed. Naftogaz added the dollar tranche in response to "reverse inquiry" feedback.

Ports operator DP World gained USD4.6 billion of demand for its USD 1 billion 10-year sukuk deal, priced at 195 basis points over mid-swaps, versus initial guidance of 230 basis points. In parallel, it sold a USD300 million tap of its 5.625% 2048 issue, priced at 4.9% versus guidance of 5-5.1%, which gained a further USD1.6 billion of interest.

On 15 July, Mexican REIT Terrafina gained over USD2 billion of demand for its USD500 million 10-year deal, priced at 4.962%, 287.5 basis points over US Treasuries versus 300 basis points initial guidance.

Greece

On 16 July, Greece returned to the markets for the first time after its change of government. It sold a EUR2.5 billion seven-year deal at 1.9%, a theoretical concession of eight basis points to its outstanding curve according to the Public Debt Management Agency's statement, and 20 b.p. inside initial guidance. The deal has the lowest yield and coupon (1.875%) achieved to date by the Hellenic Republic, having enjoyed total demand of EUR13 billion, "the largest orderbook" since Greece emerged from rescue. An impressive 335 accounts were involved, with 84% of the book coming from international buyers (led by the UK with 33%). Fund managers and banks, with 55% and 20%, led demand, with 10% allocated to hedge funds and 9% to pension fund investors.

Outlook and implications

Greece's latest issue appears an unqualified success. It has taken advantage of the wider rally in European markets to issue debt well below its prior cost levels, and with a very diverse and sizeable order book. The country has now met its 2019 funding needs, having issued at five, seven and ten years this year to build a yield curve of new reference issues.

The cancellation of the IPO for AB Inbev's Asian subsidiary came despite prior reports of oversubscription within the indicated range. While the volume of demand may have been sufficient to proceed, widespread media reports claimed that the order book lacked quality, with major asset managers rejecting the deal over pricing. Similar factors were cited over the withdrawal of Swiss Re's UK life assurance business last week. The two withdrawals flag stronger focus by major real-money buyers on deal terms, indicating that leading institutional buyers have become more sensitive over the pricing of larger IPOs.

Nevertheless, there are several clearly-positive equity-market indicators, including that:

  • US stock indices (DJII, S+P 500 and Nasdaq) all reached all-time highs last week, rallying on expectations of dovish Fed monetary policy.
  • The US IPO index also reached a 2019 peak.
  • This week's US IPO calendar is sizeable and diverse, with no sign of deal-flow drying up.

We assess that overall equity market sentiment still remains constructive, although the recent deal withdrawals indicate greater investor caution towards IPO pricing. This may well reflect prior high-profile disappointments, such as the lackluster performance of Uber's flotation.

Posted 19 July 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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