After a slow start to the year, equity financings are finally coming at a faster pace on Bay Street. But you won't find many people who are ecstatic about the news.
While bankers acknowledge that an uptick in offerings is definitely a good thing, no matter how you slice it, the recent deals aren't the best for their bottom lines.
Because yield is still so hot, many financings have come in the form of preferred shares or convertible debentures, rather than common equity. The fees earned for selling these securities are lower than straight common shares, with preferred shares typically bringing in 3 per cent of the total deal size versus 4-to 4.5-per cent for common equity.
That may not sound like much, but for a recent issue such as TransCanada Corp.'s $600-million preferred share offering – which was upsized from $300-million – even a 1 per cent difference means $6-million in lost fees. (For TransCanada's shareholders, though, it's obviously welcomed.)
And there have been a lot of preferred share deals lately. Recent offerings include: Artis REIT's worth $100-million, Capital Power's worth $150-million, and Canadian Utilities Ltd.'s worth $175-million. Converts are also hot, with WesternOne Inc. selling $45-million of them Wednesday.
But the woes don't end there. Even common share deals aren't generating solid fees because institutional investors have been finicky. Lately these accounts have been hot or cold, with investors either piling into a deal or sitting on the sidelines, hoping that the offering doesn't sell, which forces the underwriters to issue a clean-up and unload the unsold stock at a discount price.
When these big investors sit out, underwriters are forced to push more of their product on retail investors. That cuts into their fees because the selling concession, or the amount paid to the retail brokers, amounts to half of that they earn for underwriting the deal.
However, sometimes there's just no way to avoid this because the deals that come to market are for companies that retail investors love. Case in point: Pembina Pipeline Corp., whose stock yields more than 5 per cent. The company launched a $300-million offering two days ago.
The investment banks could really use some more initial public offerings for yield-oriented companies, which hit the sweet spot in the market like this. Solid companies will attract heavy investor demand, but IPOs also come with higher fees – often in the range of 6-to 7-per cent of the total deal size.
(Tim Kiladze is a Globe and Mail Reporter.)
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