Danny Tricot (London, capital markets): Capital markets in Europe were generally positive in 2017, recovering from a mixed year in 2016. The first half of the year was particularly strong for high-yield issuances in Europe, with the U.K. and Italy performing especially well, and the demand for corporate debt continuing to be high as U.S. issuers sought euro-denominated debt in order to take advantage of low interest rates. The second half of the year saw an increase in initial public offerings (IPO) activity in Europe and the U.K. in particular, with the financial and industrial sectors leading the way, a trend that is likely to continue in 2018.
The U.K.’s Financial Conduct Authority (FCA) plans to introduce a new concessionary route to listing for property companies, which may encourage continuation of the current trend of real estate IPOs in London. The FCA also plans to introduce provisions in July 2018 to improve the range, quality and timeliness of information available during the IPO process in order to create a more level playing field between connected and unconnected analysts. This will potentially lengthen the public phase of the IPO process; better and earlier access to information is likely to benefit investors overall.
Katja Kaulamo (Frankfurt, capital markets): Also on the regulatory front, the European Commission launched its midterm review of the Capital Markets Union (CMU) initiative in 2017. The initiative aims to support economic growth by enhancing access to capital, and one of its central goals is improving access to finance for small and medium-sized enterprises (SMEs). Such support of SMEs is much needed, in particular in the context of equity financing. Given the complexity of the IPO process and the costs of listing for smaller issuers, origination in this space has remained somewhat subdued in Europe since the 2007 financial crisis.
Despite the stability of the markets, low levels of market volatility, record-high DAX indices and positive economic outlook, the German IPO market — with only seven IPOs and an aggregate issue volume of €2.6 billion in 2017 — lagged behind the rest of the European Union and Switzerland, where IPO activity was up roughly 40 percent. In 2017, most exits by private equity investors from German assets were trade sales to other sponsors or strategic buyers, irrespective of whether the assets were initially offered in dual-track processes. The IPO drought in 2017 was a continuation of what we saw in 2016, when the German market had only five completed IPOs. Meanwhile, the rest of the German equity market was strong last year, with overall equity issue volume doubling that of 2016, driven mainly by large accelerated book-building offerings of liquid stocks.
In addition to the European Central Bank’s (ECB) asset purchase program, low borrowing costs created an attractive environment for debt capital markets. In 2017, corporate bond issuances remained at record levels, and the market expects similar issue volumes in 2018. The German market for high-yield bonds, on the other hand, decreased in 2017, as noninvestment-grade issuers had easier access to less expensive bank financings.
Pascal Bine (Paris, corporate): In France, debt issuances and IPO proceeds were both up in 2017. Low interest rates and an improved economic climate following the presidential elections resulted in increased volume of debt issuances by French corporations, totaling close to €70 billion for the year. According to analysts, the volume of debt issuances will be even higher in 2018. With low interest rates enabling issuers to refinance their debts at favorable conditions, around 80 percent of debt issuances in 2017 involved refinancing by investment-grade issuers. By way of exception, there was a slight decrease in the French high-yield market: €5.6 billion for the first nine months of 2017 compared to €8.8 billion for the same period in 2016. This overall trend is likely to persist if the ECB maintains low interest rates in the eurozone.
Stable and favorable macroeconomic conditions also benefited the French equity capital markets. A significant number of equity offerings by French issuers in 2017 were completed in the context of corporate acquisitions. The €3.3 billion share capital increase of Air Liquide, one of the largest French public equity issuances during the year, was completed to partly refinance the 2016 acquisition of Airgas. The volume of equity raises on the French market is expected to increase during 2018.
Despite the fact that IPO proceeds nearly tripled from 2016 to 2017, the number of French IPOs did not increase significantly during that period. The €1.2 billion IPO of ADL Automotive, the French automobile fleet management and car leasing company, was the largest IPO in France in 2017. Amid an increase of confidence in capital markets and the favorable economic environment, the level of activity on the French IPO market in 2018 is expected to be boosted by certain sponsors’ early exit strategies and the contemplated asset sales and privatization program of the French state.
Katja: Most market participants share a similarly positive outlook for the German IPO market in 2018, anticipating an increase in IPOs from corporate realignment activity and a few large spin-offs. The largest IPOs expected to come to market in 2018 are the spin-offs of the health care business of Siemens and of the asset management business of Deutsche Bank. Generally, investors remain selective and seem to prefer the larger, more liquid stocks.
Overall, the fluctuating value of the euro presents a source of uncertainty, as does the question of whether the ECB will decide to reduce its asset purchases in early 2018.
Danny: Additionally, political developments within Europe, including in relation to Brexit, will continue to create a certain amount of volatility in European capital markets in 2018; however, investors have weathered these challenges so far.