Dealmakers expect the pace of secondary equity offerings to quicken in coming quarters after a slow start in the first two months of the year, and a wider variety of industries probably will raise money through follow-on offerings.
In the first three weeks of March, more than 50 deals have been completed, raising $10 billion. In the second week of the month alone, 20 transactions raised nearly $6 billion, according to syndicate professionals at several investment banking firms.
Many investors have stepped up purchases of follow-on issues because they expect continued improvement in the U.S. economy. "There's clearly been a meaningful improvement in volume absorbed in the secondary market … as we continue to distance ourselves from the financial shocks of 2008 and 2009," said Scott Coburn, head of equity capital markets origination at Broadpoint Gleacher. Many of the follow-on deals so far this year have come from financial services companies like PNC Financial Services Group, Hartford Financial Services Group Inc. and Charles Schwab Corp.
Bank holding companies have used the proceeds to repay Troubled Asset Relief Program money owed to the Treasury Department or put it to work by lending to corporations.
Last week, for example, Hartford, the giant insurer, completed a $1.45 billion deal. Its proceeds are to be used to help repay Tarp funding by buying back $3.4 billion worth of preferred shares issued to the Treasury.
Others repaying the Treasury include Comerica Inc. and PNC.
On March 9, Comerica, the holding company for Comerica Bank in Dallas, raised $800 million.
PNC, a Pittsburgh bank holding company, raised $3 billion last month that went toward repaying $7.6 billion owed to the U.S. The bulk of the volume of secondary equity in the first three months of the year may have come from financial services companies, but market players say they believe the variety of issuers will broaden.
"While the financial sector has taken the largest share of financings over the past year, nearly two-thirds of the total, we believe as the markets continue to normalize the breadth of participation should improve considerably," said Broadpoint Gleacher's Coburn.
In addition to financial services companies, the most active issuers have been energy and power businesses.
Year to date, 21 energy and power companies have raised $4.1 billion. In the fourth quarter, 34 power and energy company deals raised $5.1 billion.
Much of the money raised by these companies is used to pay for exploration and maintenance of equipment.
On March 10, for example, the energy provider EQT Corp. raised $550 million to continue developing wells.
Brad Miller, global co-head of equity syndicate at Deutsche Bank, said dialogue with potential issuers of follow-ons is up threefold. "There still appears to be plenty of cash and liquidity on the sidelines."
Within the U.S., the top underwriters of secondary equity are JPMorgan Chase & Co., Morgan Stanley, Goldman Sachs Group Inc., UBS AG and Bank of America Merrill Lynch, according to Thomson Reuters.
These investment banking firms have been book runners or joint book runners.
Meanwhile, private-equity firms have been able to sell off stakes in their portfolio companies through secondary equity sales. The PE firms need to show their investors that they can deliver results on the heels of the credit crisis, bankers involved with the equity deals said.
"Financial sponsors have been using the follow-on market to monetize some of their secondary shares and to demonstrate to their [limited partners] that they have created value," said Tyler Dickson, head of global capital markets origination at Citigroup, "and that's important to them in this environment."
More than 15% of the proceeds of deals done so far this year were used to pay out PE firms, according to Dickson, versus 2% of the total during the past two years.
So far this year, Wall Street syndicate desks have raised $22.3 billion through the sale of secondary equity offerings for 126 companies. That's up from 51 transactions at the same point in March last year, when $9.9 billion had been raised. In the fourth quarter, $69.4 billion was raised through 154 offerings, according to Thomson Reuters.
