Canadian capital markets showed some signs of life in the third quarter of 2009, with activity levels for both equity and debt issues picking up starting in the middle of this past summer. Whether the pace of deals will hold steady as the year end approaches remains to be seen. New issues in the mining and financial institution sectors continue to account for a large portion of public offering activity, continuing the trend that started in late 2008 and early 2009 as Canadian banks and gold mining companies began to tap the markets with common share issuances.
Recent equity raises included large offerings by Brookfield Properties, Fairfax Financial Holdings and Barrick Gold. The Barrick transaction, at over US$4 billion including the over-allotment option, is the largest ever Canadian offering of common shares. Offerings by Canadian REITs also made a comeback, with eight REITs announcing or completing transactions in the month of September alone. Half of those transactions were offerings of convertible debentures, which offer issuers a lower yield than the yield on new equity.
While it may be too early to tell if the trend will be long-lasting, the Canadian markets also started to warm to initial public offerings after a long chill that began in late 2007 and got progressively worse with the financial crisis in 2008. Three IPOs were completed in July of this year, including the two largest IPOs to date in 2009: the spin-off transactions for Genworth MI Canada and Capital Power. Dollarama recently announced its IPO, and transactions from other issuers are rumoured to be in the pipeline.
The Canadian debt markets have been similarly robust. The media has recently reported on issuers such as Rogers Communications returning to the Canadian market after having been a long-time issuer in the United States, as well as other Canadian issuers, such as Viterra, selling high yield debt in offerings that were principally targeted at Canadian investors.
Large offerings, such as the Brookfield and Fairfax transactions, are notable not just because of their size, but also because they involved concurrent offerings to public investors and existing shareholders. In the case of Brookfield, half of the shares offered were sold to a majority shareholder to allow that shareholder to maintain its proportionate interest in the company. In the case of Fairfax, the company had arranged for the purchase of shares by certain institutional investors alongside the more conventional underwritten offering. In these transactions, the underwriters received either no commission or a reduced commission on the non-public portion of the offering.
Issuers need to be mindful of the many technical issues raised by doing concurrent offerings to the public and other investors. Most importantly, they need to stay onside of pre-marketing and tipping restrictions under securities laws. Issuers should consult counsel before having any discussions with potential investors about purchasing shares in an offering that has not yet been announced.
TSX Concerns with Large Discounts
Another major development in 2009 was the TSX’s heightened sensitivity towards offerings done at what the TSX considered to be an excessive discount to market price and its willingness to impose its private placement restrictions on prospectus offerings. The most widely publicized example of this concerned the offering by Calgary-based OPTI Canada. The TSX refused to approve this offering without shareholder approval after the offering was announced and marketed. The offering price, in this specific case, was at a greater than 20% discount to the company’s five-day volume weighted average price. The TSX generally allows only up to a 15% discount on shares offered under a private placement where the market price of the shares is above $2.00. Although TSX rules have permitted the exchange to impose pricing and other private placement restrictions on prospectus offerings, until this year, many would have considered the exercise of such discretion to be unusual.
Since the OPTI offering, the TSX has been working with other industry participants to provide guidance on when the TSX will apply its private placement rules to prospectus offerings. Until such guidance is issued, companies and their counsel will need to consider whether pre-launch discussions with the TSX before a prospectus offering are advisable in circumstances where:
(i) the expected discount to market price on an offering will be greater than 15%;
(ii) the shares will be sold to one or only a handful of institutions or will otherwise not be widely marketed; or
(iii) insiders will receive a benefit in connection with the offering, such as preferential allocation or the ability to subscribe for more than their proportionate interest.
These types of features may result in the TSX raising objections to an offering.