ONE | ACQUISITION-FINANCE OPPORTUNITIES
We expect economic conditions, including those discussed in our M&A Trends piece, to continue to create opportunities in the M&A market. As well-positioned issuers pursue these opportunities, some acquirers will access the public markets for financing. Issuers whose equity is not under pressure will be the most favourably positioned to use their shares as acquisition currency. Privately placed debt capital markets transactions may also be utilized to finance acquisitions. The energy sector, in particular, will have many opportunities, as discussed in item six below, and distressed M&A in the oilpatch, whether as whole business or select asset acquisitions, will likely create financing opportunities for both the public and private markets in 2016.
TWO | CANADIAN SPAC MARKET TO REMAIN BUOYANT
This year, special-purpose acquisition corporations (SPACs) were introduced to Canadian capital markets, with the April 2015 launch of the first-ever Canadian SPAC. A SPAC is a “blank-cheque” company that provides the public with the opportunity to invest alongside a group of successful sponsors in a private-equity-like structure that offers downside protection and a leveraged opportunity to participate in the upside of a qualifying acquisition over the longer term. Canadian SPACs raised more than C$1-billion through five initial public offerings in 2015.
We expect the Canadian SPAC market to remain buoyant in 2016, and with over C$1-billion in escrowed funds, we expect several of the existing SPACs to complete their qualifying acquisitions. Further, we expect the recent trend of more bespoke SPACs to continue, with issuers signalling their intention to focus on a specific sector or geographical area. We also anticipate that successful sponsor groups will return to the market once their initial SPAC completes its qualifying acquisition. Finally, as a relatively new structure in Canada, SPACs will likely undergo further regulatory and market innovations.
THREE | CONTINUING EVOLUTION IN ETFs
Implementation of regulatory changes that enhance the disclosure of the retail cost of advice and investment will continue to accelerate the ongoing evolution of the asset-management industry. As fund sponsors brace for a global shift in assets from high-fee to low-fee products, the industry is preparing for impacts in different ways. Some managers are putting up defences and lowering fees on existing product suites. Others are taking an offence position, looking to acquire or develop their own expertise and offerings in new business segments that have found tremendous success in the U.S. While the former are hoping to maintain the status quo, the latter has resulted in new players announcing their first foray into exchange-traded funds, robo-advisers and a complimentary suite of platform-traded funds.
FOUR | SELECT TECHNOLOGY FINANCINGS
The technology sector outperformed all other sectors on the Toronto Stock Exchange in the past two years. However, as markets cooled generally in the second half of 2015, so did interest in tech financings. Some are concerned that technology-sector valuations have peaked, resulting in issuers deferring financings that had otherwise been contemplated and buyers showing some constraint, leading to a decline in formerly robust tech-sector M&A activity. Until markets rebound, or interest in tech-sector firms increases, 2016 will likely be comparable to the second half of 2015, with selective investment focus on businesses with demonstrated commercialization, experienced management and strong growth potential.
Specific areas of interest are expected to continue to include fintech, following 2015’s cluster launches in Vancouver, Toronto and Montréal; cloud-based SAAS offerings; mobile technology and applications; and enterprise social media. As always, M&A may be the only viable exit for tech companies unable to secure financing in softer markets. Foreign tech investors may view these conditions opportunistically, particularly given favourable conditions for investment in Canadian companies generally, including low interest rates and a favourable exchange rate relative to the U.S. dollar, which are expected to continue.
FIVE | ALTERNATIVE FUNDING SOURCES FOR MINERS
Mining issuers will continue to face capital-raising challenges in 2016 as commodity markets scrape the bottom of the cycle. With equity capital markets remaining constrained for mining issuers, streaming and royalty transactions will play an increasingly important role. Issuers with late-stage exploration and development-stage projects with near-term prospects for production are seeking capital through multiple channels, including private equity sources, particularly specialty-resource funds, in combination with project debt, offtake agreements, royalties and streams, and equipment-financing facilities. Some traditional equity financing is expected to continue as part of these financing packages through modestly sized private placements and public offerings. Issuers may also take advantage of the new streamlined rights offering rules in Canada to provide existing shareholders an opportunity to participate and avoid further significant dilution when facing falling share prices. For the large- and mid-cap producers, we expect balance sheet management undertaken in 2015 to continue through the sale of non-core assets, productivity improvements and cost-control measures. Earlier-stage exploration companies will continue to find capital scarce until commodity markets improve, with an increasing number of distressed financings in the form of small private placements of equity and convertible debt to existing significant shareholders expected in 2016.
SIX | E&P PLAYERS' CAPITAL MARKETS ACCESS
The 2016 outlook for exploration and production companies (E&Ps), including senior issuers, appears similar to 2015 due to continuing low natural-gas and crude-oil prices and the perception that the sector faces a “lower for longer” pricing environment. However, numerous factors could influence capital markets activities on a selective basis:
- Asset divestitures could lead to an increase in acquisition-related financings by E&Ps with relatively healthy balance sheets. Lenders may become more aggressive in requiring distressed borrowers to de-lever through disposition activities, including sales of attractive crown jewel assets, thus providing a catalyst to remove the bid/ask spread that often constrained disposition activity in 2015.
- Senior issuers with an integrated business model may continue to benefit from higher downstream margins and so may enjoy better capital markets access to fund capital expenditure programs or acquisitions.
- A significant inventory of committed development projects remains for Canadian issuers involved in the pipeline and midstream sectors, many of which were committed to by producers before the downturn. These projects will require such entities to regularly access the capital markets through various financing structures, including common and preferred equity and debt and hybrid securities.
- Pension funds will also continue to examine energy-sector investment opportunities with particular interest in deploying capital into stable long-lived assets, including innovative royalty structures.
- Private equity players are also expected to remain active in the energy sector, backing strong management teams and focusing on infrastructure-sector capital-deployment opportunities.
Any move by U.S. or Canadian central banks to increase interest rates may affect the preferred-share and investment-grade debt markets, which have both been the most active capital sources for energy-infrastructure issuers.