Mid-Year Update – Financing & Advisory

Roman Dubczak: Hello, everyone.  I’m Roman Dubczak, Deputy Chair of CIBC Capital Markets. At CIBC we’re here to help you keep your ambitions on track by adapting to your evolving needs. And I’m pleased to lead today’s mid-year update on financing and advisory, where we’ll hear from our experts. Tyler Swan, Head of Equity Capital Markets. Mike Boyd, Head of Mergers and Acquisitions, Jacqueline Green, Head of Financial Markets in our Corporate Debt business, and Sean Gilbert, Co-Head of our Debt Capital Markets business.

So very exciting times in the markets, seemingly a lot going on. Although volatility has declined quite a bit. But nonetheless, from where we were this time six months ago, and by way of update, I would say significant changes in volumes, transaction activity, etc.. So, Sean, why don’t we start with you in Debt Capital Markets and give us a bit of an update on how the last half has gone and maybe a bit of a lens on what’s going on.

Sean Gilbert: Sure, sure, Roman. Thanks. Yeah, and if I had to describe the first half of 2024, in one word, it’s “busy”. It was busy everywhere. It was busy globally in every corner of the debt capital markets. I think you’ll see we were at or near record volumes, maybe zooming in a little bit to the North American markets, both in Canada, and the US, we saw really, really strong uptake and uptick in activities. Maybe starting with Canada. Overall, corporate and financial issuance was up 50% year-over-year. And breaking that down a little bit further, I’ll talk about the corporate market first, surpassing the Rogers deal of $4.25 billion back in 2022. both domestic and foreign market, foreign issuers being the Maple market. That market was up $24 billion year-over-year.

That’s a 72% increase. And maybe kind of looking into that and talking about some of the factors that led to that, we can see some trends. There’s four identify areas that I think were responsible for that growth. Number one, we had new issuers in our market. We had eight new issuers in our market for a total of $10 billion. It’s a significant increase. Those numbers are padded a little bit. As part of that issuance, we had the inaugural deal for Coastal GasLink, was a $7.15 billion transaction. So they came out of the gates running.

That was the largest corporate deal in Canadian history, So new issuance of the market number two maturities, we had a much higher level of maturities in Canada than we did last year, depending on the measurement of how you look at it, it’s between $12 and $15 billion increase versus last year. The third is M&A funding. And I won’t double count Coastal GasLink because that could be technically viewed as that. But if you strip that out, we still had over $5 billion of M&A funding in the first half. And to put that into context, that’s compared to $6 billion for all of 2023. So a nice uptick. And then the final component is the Maple market, the foreign issuer market. That market was about $8 billion this year.

That number alone would have surpassed any year, in the last four of the last five, the last big year we had was 2021, which was a record year in Canada. And that market’s a little more volatile. But what we see there is when issuance is up globally, we tend to see issuers look to alternative sources of liquidity, as a way to take price breaks and size pressure off of their core markets. Canada typically is a beneficiary of that. So we did see some nice activity there. On the domestic bank front, seems weird to apologize, that number only increased by 15%, which is, you know, that’s a pretty good number.

Global Canadian banks, globally, reduced issuance. They just had less needs globally, but a higher proportion of that issuance actually came to Canada. There are many reasons why the Canadian banks need to fund less. Jacqueline will know this intimately. Less demand for corporate loans, higher deposit rates. And I think banks entered into 2024 with really, really strong balance sheets. Looking briefly at the US market, similar trends, the investment grade corporate market as of the half was $900 billion, give or take. That’s a 24% increase. And to put that in the context, last year was about $1.3 trillion. So a nice start to that year. And in the US High-yield bond market, total issuance in the first half was $160 billion, compared to $175 billion for all of last year.

And that market really benefited from lower interest rates and a much more stable market refinancings or a big driver of that growth. So maybe just looking at the market overall, I think we were set up for success on the bond market. And I’ll I’ll point to four things. Number one, a very favorable spread environment. Spreads in the first half came down and touched multi-year lows from an issuer psyche that was a pretty, pretty important factor. High investor liquidity. We did see assets move into the fixed income market, and we did see them chase product, the continued inversion of the funding curve. And by that I mean short term funding rates on the bank side. So in Canada CDOR, now CORA. And on SOFR, those rates were elevated compared to ten year treasury. And that inversion is 1 to 200 basis points depending on the timing depending on the measurement. And so sitting on bank that was actually expensive.

But I think that drove issuance into our market. And finally, I tried to think of a good word for this, but “acceptance”. I think issuers just accepted the fact that this was the rate of funding. They’ve been staring at coupons for the last year, year and a half, give or take, in that same range. If you look at a 12 month, historic chart of where funding costs are, each one actually stood on the shorter end of that or the tighter end of that. And I think the acceptance from issuers, COVID coupons, which were really, really low, I think are firmly in the rearview mirror. As for an outlook in 2024, for the rest, I hope I’m wrong. but I have to say that, you know, we do see, volumes moderating. I don’t know if this pace can keep up.

Really briefly in Canada, lower maturities. And I think some of those maturities were actually, financed in the first half. In the US, the narrative we had from clients was that they looked at 2024 as really a nine month issuance window just because of the election volatility, which we are seeing some of that play out right now. And so I just worry that there’s a use of proceeds issue with respect to the volumes that were funded. But I do think that we will see, elevated, weeks of issuance when market tone is strong. And we’re seeing that a little bit entering into July. And so I do think although I think levels will come down, we will see it more concentrated in periods.

Roman Dubczak: Well, look… I hope you’re wrong, but I suspect you’re right. So, thanks for that update, Sean. And maybe Tyler will flip it over to you. And certainly signs of life in the equity issuance market from, you know, previous periods. So maybe walk us through that. And reasons to be optimistic on the equity front.

Tyler Swan: Sure Roman, thanks. So equity activity is actually picked up this year but it’s still below normalized levels. So I’d like to use 2021 as a high watermark. It was a very big bull market very robust equity financing activity the year after that 2022 is about 23% of that level. So a big drop off the next year, 37%. And this year we’re running about 55% of where we were during that year.

So volumes have been steadily recovering last few years but still below their highs. So why has that recovery not happened? Maybe at the pace that maybe we expected at the beginning of the year, we did start the year with the expectation that we’d get quick and numerous rate cuts, and that would propel the broader equity market outside of the concentrated tech companies that have been leading the market. And it would drive a rebound in earnings growth and a broader rally. That would, in turn, drive a lot of financing activity, M&A activity, IPO activity. What we actually saw in the first half is those rate cuts, as we know didn’t come as quick. They were pushed off that 5 or 6 turned into 1 for Bank of Canada. Now a later half, one for the fed. And as a consequence that pace of financing activity, it’s picked up. But it hasn’t resulted in a really robust issuance calendar.

So if I think about that concentration actually continuing in the first half, the top ten S&P 500 companies, 37% of the market, they were in fact up 19% during the year. And if I look at the broader market, our TSX is only up about 4% and 40% of companies in the S&P 500 actually down during the first half. We did get a big inflection point a couple of weeks ago. That might be the turning point. The US CPI number was very tame. Very much cemented, the view that we’re going to get a rate cut in September by the Fed. And as a consequence of that, broader market indices are really picked up and started to rally.

So the Russell 2000, a good barometer for value, small and mid-cap, is up 11% over the last two weeks. So I really do think that we’re a little bit delayed in some of that broader financing activity. But we really do think it’s coming with these rate cuts. And then there’s a consequence for the rebound in earnings growth. If I was to think about what we did see a lot this year in terms of activity, some of the big themes, 35% of North American activity were secondary. So just the sale of existing stock. The convert market continues to be very robust. It’s 35% of North American activity. In the US, it’s the growth sectors that have been the big issuers.

Tech is about 30% of issuance, biotechs about 20%. And in Canada it’s been about mining. So most of the metals prices have hit highs this year at various points this year. So a lot of financing… copper, gold, across the commodity space. And that’s actually 45% of total TSX issuance. IPO market in the US has been rebounding. There’s been 27 IPOs in the US this year. TSX has only been a couple IPOs in Canada the last couple of years. And we’re viewing that more as a rebound story for next year. But we do have a recovering IPO market that we think will result in a bigger market next year for IPOs.

Roman Dubczak: Thanks Tyler, so that’s promising. So good financing markets so far in the public side, Mike, usually that feeds into or is a derivative of M&A activity. And certainly seems like you and your team have had a busy six months at least. It’s been a couple of years I think really.

Mike Boyd: Yeah, no it’s definitely it’s definitely been busy, Roman. But it’s been it’s been interesting in that I would say if you look at the numbers in terms of deal volumes, it’s been a just okay year in terms of M&A, from a dollar volume perspective. Globally, M&A volumes are up by 18% over last year, so that’s pretty good.

But last year was a pretty tough year. And while the trend is improving, 2024 is on pace to still be below every year we saw from 2017 to 2022. And in Canada, volumes have been more challenging, with M&A down 10% in dollar value terms from what was a fairly weak 2023. And so what are the reasons for this? And I would point to a few factors.

First of all, you know, one of the themes I think today is these rates are so important to all of our products, but rates have continued to be, you know, stubbornly high, I would say, which has negatively impacted the cost of financing. And despite this, the equity market, as Tyler has just mentioned, has recovered in a number of sectors. And that’s made valuations more expensive for acquirers. And so that’s been a bit of a tough equation for people to navigate. And deal sizes have come down.

And as it has, it has been harder to finance what I would call ‘mega deals’, you know, deals larger than $10 billion, to give you a sense of this back in the highs of 2021, at the COVID M&A boom, if you want to call it that, there were 52 deals globally valued at $10 billion or more. There have been only 18 so far this year. So we have seen deal sizes come down. Although you know, certainly from a number of deals, perspective, it continues to be busy. And I would say in Canada, the other thing that has impacted activity is that some sectors in Canada are quite consolidated. If you think about retail or telecom, and that’s reduced the scope for additional large M&A.

I am more positive, though, in terms of what I expect to see moving forward. you know, the consensus clearly is that we’ll see rates moving down and that will be a positive catalyst for M&A. We obviously saw the Bank of Canada cut today. To the point that Sean was making, leveraged finance activity has improved dramatically in 2024, both in terms of high yield and leveraged loans. And this is very important both in terms of the market capacity to fund deals, but also obviously in terms of financing costs. So that’s a real positive. We are seeing private equity, activity picking up.

And, you know, PE firms have really kept up their fundraising over the last number of years. So we’re seeing, them with record amounts of capital to invest after a couple of years of, of reduced deal activity where they were more on the sidelines. So I think that’s good. The economy continues to be fairly strong, particularly in the US. And I think CEOs and boards are more confident in the outlook than they were a year ago. And that’s always a big driver of M&A activity. And finally, in Canada, commodities are doing very well. And that usually leads to deal activity in areas like mining and energy. So certainly there are a number of reasons to be optimistic going forward.

Roman Dubczak: All right. Thanks, Mike. And at the foundation of it all, Jacqueline Green, maybe give us some insights on the corporate banking market, which is, you know, either at the front end or the back end of the chain, all these financing and M&A activities.

Jacqueline Green: Thanks, Roman. I would say the bank market had a very stable first half of the year. Volumes were up 16%. And I think that’s notable because it’s actually the first time since 2021 that we’ve seen an increase in volumes. And in fact, if I rewind to where we were at this time last year and you made this point, at the beginning we were grappling with a lot of headwinds. We had bank failures. That obviously has a big impact on the bank market. We had geopolitical volatility. We had a slowing economy. We had a regulatory reform.

And what I would say sitting here today is that we still are grappling with many of those headwinds, but banks are better prepared to manage the impact than they were a year ago. And so looking forward in terms of where we’re at now, banks spent a lot of last year shoring up their balance sheet. And I would say that we’re starting to see the tone shift to being back in growth mode. And certainly that’s very supportive for bank market conditions.

Regulatory reform continues to be prevalent, but I would say banks are better positioned to manage the impact of that. And then lastly, if we look at the trend in new issue credit spreads in the bond market as a proxy for bank funding costs, those are down quite materially from the peak that we saw in early 2023. Taking a step back, what I would say is that interestingly, the volumes don’t actually tell the full story. And we saw some pretty big differences between markets.

And maybe I’ll start in Canada. In Canada, volumes were up 38% year over year. But the big theme in Canada was the CDOR to CORA transition, or risk free rate transition, as Sean alluded to. Very similar to what we saw in the US with the LIBOR to SOFR transition. That accelerated a lot of volume to Q2 of this year, which was an exceptionally busy quarter after what was actually a fairly quiet Q1. And in fact, in June, we saw one of the busiest weeks in Canadian bank market history. What I would say about all of that, which is important, is that even though it was the transition in or the regulatory reform that changed accelerated the volume, the support that we saw from the bank market was very strong. And that is a sign of very stable market conditions.

If we look south of the border, volumes were also up 14%, but there was actually a really big difference between the investment grade market and the sub investment grade market. In the investment grade space, volumes were down 17% year over year. And I would say that is less of a reflection of appetite on the part of banks to lend, and more so representative of the fact that we’re seeing very strong bond market conditions, as Sean spoke to. The inverted yield curve in particular, was a very attractive for banks that had funding needs. And so we saw market volumes being redirected away from our market to the bond market.

The second comment I would make is that, you know, in a floating rate environment, just generally speaking, the rate environment has not been conducive to raising funding in the bank market. When we looked at the sub investment grade market, we saw the complete opposite trend. So volumes were up 48%. But again, when you peel back the layers, it’s not quite indicative of what is actually going on. That was heavily skewed by the institutional loan market that Mike alluded to. So what we call the ‘Term Loan B Market.’ And after a very quiet couple of years, we’ve seen a huge influx of activity and demand because of attractive pricing, mostly refinancing activity.

But again, that is really skewing the statistics upwards. If you take that institutional activity out and you look at what we call core bank market activity or pro-rata loans, volumes were again down year over year for similar trends to what I mentioned in the investment grade space. It’s worth mentioning that the project finance market is not included in any of these, and I always like to touch on that, because that is an area where we continue to see growth year after year, a tremendous amount of demand from sponsors and issuers and a tremendous amount of supply from banks. And that continues to drive very attractive terms for borrowers. So where does all this leave us? We’ve had volume increases. We’ve had volume decreases. I think there are some very common themes across all of the markets, irrespective of the volume changes.

One is that lenders continue to be selective. And that said, they’re still showing very strong support for their core relationships. So we’re seeing more movement in syndicates than we might have historically, but we’re also seeing some banks come off the sidelines. relative to last year, US regionals would be a good example of that. And that is creating more bank market capacity. The second thing I’ll mention is that irrespective of which market you’re looking at, a large majority of what we see is refinancing activity. And so it’s companies coming to market, amending existing financing that they already have in place as opposed to raising new money. And I think that’s relevant to mention because support for normal course activity is always a sign of a stable market. That’s really, really important. The third theme I’ll mention is that appetite for funded debt or for term loans has reemerged.

There was quite a bit of reticence around this a year ago or two years ago because of higher funding costs, but we’ve started to see the pace in term loans pick up, albeit at shorter tenors, than we saw historically, typically in the 1 to 3 year range versus upwards of five years historically. And then last but not least, we’re seeing pricing stabilize. Last year we talked a lot about upwards pressure on pricing. And while we’re still seeing select situations that require a premium in certain sectors that command a premium, generally speaking, that upwards pressure has dissipated in favour of borrowers. And that’s for the reasons I mentioned right off the top, banks have more capital and that cost of capital has gone down.

So looking forward to the rest of the year. I would say we expect in Canada that volumes are going to normalize. but certainly the market is very well positioned, for the remainder of the year. In the US market, it’s worth, of course, acknowledging the election that we have coming up. I would say that outside of event driven financing, which may be put on the sidelines until there’s a little bit more clarity on the market, because the bank market is so relationship based, we really don’t anticipate a big impact on the market from the upcoming election, irrespective of the outcome. So overall, you know, the message I’d leave you with is, really solid fundamentals in place to support continued growth in the market.

Roman Dubczak: Excellent. Very good synopsis of, kind of, the health of the financial sector in general. So four decently, optimistic messages, in a row. So that’s good to see. I think Mike mentioned earlier that we saw a rate cut today in Canada. Second one, in a row and potentially more to come. So, Sean, I thought I’d start with you in terms of, you know, the impact of a declining rate environment over some period of time, like, it looks like it’s going to go on for a while here.

Sean Gilbert: Yeah. I mean, that’s that’s the debate. So I think we’re seeing, either central banks cutting or thinking about cutting and going forward. And so, so what what does that have. What would the impact on that be for our market? You know, the bond market anticipates monetary policy. It should price that in. And I think we saw that in October of last year when they did The Fed Pivot. And then rates really rallied coming into the end of the year, which was favourable. I think issuers couldn’t trap the last sort of three weeks of that because it was kind of a blackout period from a issuance point of view. So we saw that come down. Theoretically, that should have been the repricing of the fed pivot.

I think rates on the term part have spent the first half of the year reacting to economic releases to try and figure out where monetary policy will go in the future. And I think where we’re at right now is at a pretty balanced level. And by that, I mean, I think the market and the fed dot plots are, are pretty much aligned. So that’s nice and stable. Having said that, I think part of the reason that you saw some of the heavy issuance going into the beginning of the year was to kind of grab those lower rates, and we’ve tracked this in Canada on a monthly basis. And when you see a dip in rates, even a little bit, you see activity pick up. So I think it shows have been doing a good job at reacting to that. But as rate cuts kick in, I would say two things.

First, I’ll go to the one that Mike touched upon. M&A financing theoretically is a little more attractive and especially on the shorter end. So those shorter end rates hopefully, hopefully spur some of that activity. I also think it will change the issuance pattern of borrowers. And if you do see those rate cuts come in, I think if you look at CIBC’s projections, commensurate with those rate cuts, you’ll see the shorter end of the curve react a little bit more than long end. The long end should have that priced in. And so, you know, I wonder whether when we see that, do we see issuance shift to the shorter part of the curve and think five years in under seven years and under, as those coupons now just become a little bit more attractive?

The play for the first half, was the relative cost to terming out… was relatively minor on a historical basis. And I think you’re going to see that shift. And so I wonder whether that will have an impact. Longer term, as rate cuts really do take hold. That funding disadvantage that the bank market had with higher short term rates than, than the current, as the curve steepens, we’ll lose that as a maybe driver of business. So that’s something to keep an eye on. Is the relative cost not only on the curve but between the bank and the bond market?

Roman Dubczak: Will we see a shift in the credit curve, so to speak?

Sean Gilbert: Yeah.

Roman Dubczak: More favourable tone for lower rated credits for example?

Sean Gilbert: Yeah, I mean the credit curve typically adjusts underlying rates. And so, you could see a bit of a steepening. That, as well as the risk premium on the front end, it comes off a little bit just because that those rates fall down. We should definitely see that adjust. And that will be the second component to my opinion, to making those short end coupons a little bit, a little bit more attractive.

Roman Dubczak: Okay, good. Thanks, Sean. Mike, no shortage of news, from governments in general, macroeconomic events… A piece of news that impacted the M&A scene in Canada, pretty directly, I think, was the announcement from the federal government about the impact on critical minerals M&A going forward. Clearly, not a very clearly clear message, but it certainly created quite a bit of discussion in M&A circles in Canada. Maybe you want to spend a bit of time on that and walk us through what your thoughts might be.

Mike Boyd: Yeah, sure. And what the minister actually said as he came out and he said that, “transactions involving important companies, involved in significant transactions in the critical minerals industry will only be approved on an exceptional basis”, which was quite a significant statement in itself, I think. I think it was, unclear in a number of areas and probably intentionally so.

So I think it created more questions than it provided, answers to, you know, for example, when he said it would apply to “important Canadian mining companies engaged in significant critical mineral operations”, what is the definition of ‘important’ and what is the definition of ‘significant’? So it’s really unclear as to exactly who this will apply to. The market’s view of it is that it will apply to obviously larger transactions in the sector. The question is where is that cut off in terms of where it will be become more difficult for a transaction to be approved?

I think it’s our view that the bar has definitely been raised significantly, in terms of getting Investment Canada approval on a transaction in the critical minerals space. And so, you know, the impact of it, but we think, is that it should likely reduce transaction activity involving foreign acquirers, obviously. But it might also have the effect of increasing activity between, domestic Canadian companies, where obviously government approval won’t be an issue.

Roman Dubczak: Yeah, certainly the macro forces on critical minerals are like overwhelming. So yeah, I, I agree with your view. And just reflecting on the comment, I don’t think there’s a single transaction we’ve ever done where it wasn’t an important transaction for a significant client. So I guess we’ll be, we’ll be busy with our government relations people and try and assess that.

Mike Boyd: Absolutely. And certainly I think it’ll be interesting to see how it actually plays out here in the next a year or so.

Roman Dubczak: Yeah. Okay. Thanks Mike. Jacqueline, financing, you know, M&A activity certainly has been robust. I did want to actually surface a comment you made, in your opening statements about project finance activity. Project finance is a colloquialism for renewable energy finance, right?

Like, and it is a very significant part of the corporate banking scene. So maybe some comments on on project finance and renewable energy and the significant growth. I think that’s a bit underplayed in the context as relates to Canadian banks and financing activity etc.. Like, that is a… it’s a big number that doesn’t get reflected.

Jacqueline Green: That’s right. Yeah. And I would certainly agree with your comment that when we when we look at where the big driver of growth is in project finance, it’s really renewables. Yes. It’s undoubtedly, there’s a huge amount of regulatory support for them. There’s a big amount of demand on the part of issuers, and it’s an area that banks have developed expertise in, and they’re leaning into quite heavily.

You know, we are seeing growth in other areas in terms of infrastructure and whatnot as well. That would tie into project finance. But there’s no doubt that when I talk about ‘terms being tighter year over year’, renewables is absolutely the bright spot where we see that.

Roman Dubczak: Yeah. Good. Actually, Mike, maybe just back to you in terms of M&A activity, renewable M&A… and a lot of it is asset type of transactions, it’s a significant driver of growth and momentum in M&A markets, right?

Mike Boyd: Yeah I think one thing we are seeing is certainly in that space, we’ve seen a lot of transaction activity, and a lot of it happens a little bit below the radar. In terms of it’s an asset transaction. But it might be, you know, $1 billion transaction or a $500 million transaction. And sometimes those, you know, even the value isn’t reported, because it’s a private transaction. A lot of that activity is private, but it is certainly an area of, I would say a growth in the M&A business generally and certainly an area of growth in our M&A business.

Roman Dubczak: Yeah. Okay. Thanks, Mike. Tyler, maybe I’ll flip it over to you. you touched on improving tone in the IPO market. Clearly there are signs of that in the US. A little bit of it here in Canada. You know, what’s your view kind of prospectively on an IPOs? Are we in a period of like maybe a prolonged discovery, so to speak, or do you think this might pick back up sort of maybe even post-election?

Tyler Swan: Yeah, sure. So, as of, 27 US IPO this year across a mix of sectors, some bigger ones like Viking Cruises, Amer Sports and several sporting good brands. Reddit… Rubrik, a cybersecurity company. Performance of the IPOs, actually been quite strong on a dollar weighted basis. The average IPO has been up 20%.

So usually when we think about the prospect for future IPOs, the market looks to how all the IPOs that have recently priced, how well they performed. A very big backlog in play, some pipeline. And I’m going to just throw up a chart. And the chart really reflects something that, I think a number of us spoke of, which is really where we are in financing for risk assets. So I think of that as the US IPO market, leveraged finance, high yield.

And then what the chart shows is over a number of years, the ups and downs in the cycle and clearly shows the COVID peak, the COVID fall off and risk asset financing, but also the beginning of the rebound. So that includes the IPOs that I’m speaking to, but also the robust TLB market. And what it also shows is that we’ve rebounded, but we’re away from the highs. And what we should really expect, especially with the backdrop of lower rates, is that that those markets really continue to pick up.

So I do expect the next couple of years to be very busy on those fronts. Canada has been a little bit delayed, and we see that more shaping up in the first half of next year, but also a very good pipeline there as well.

Roman Dubczak: Okay. Thanks, Tyler. Look, with with that, let me thank all of you for a great, summary. Tyler, Mike, Jacqueline and Sean. And, you know, I’m just thinking the next session we have, there will be a new president of the United States, that’s for sure. There will be all sorts of events that have occurred. Hopefully more peace in the world, than not. But nonetheless, lots going on.

So it’s a very exciting, period of time for all of us. But thanks for your, thanks for your comments. And I’d like to thank all of our clients who joined us here today. Certainly reach out if you have any questions or concerns, or any insights you’d like from our team. We’re always here, ready to answer your questions and to help you navigate the markets. So with that, thanks for joining us and hope to see you again soon.