Saturday, December 29, 2007

Equity capital markets poised for boost

By Rachel Morarjee

Published: December 28 2007 18:52 | Last updated: December 28 2007 18:52

Equity capital markets will get a boost next year from financial institutions seeking to shore up their tattered balance sheets and from private equity firms looking for an exit from earlier investments, bankers said.

“What looks very likely for 2008 is a wave of capital increases by financial institutions in the EMEA region [Europe, the Middle East and Africa] looking to repair their stretched balance sheets,” said Viswas Raghavan, head of international capital markets at JPMorgan.

With the share prices of some of the biggest investment banks down by as much as a third from their summer highs, troubled financial institutions will be reluctant to issue straight equity that would dilute their share prices further.

Instead, like Citigroup, many are likely to look at convertible bonds which can be changed into equity at a later date, allowing existing shareholders to cash in on any upside and giving the issuer the benefit of a tax deduction on the coupon.

“There will much more activity in the Tier 1 space next year,” said David Lyon, a managing director in the financial institutions group at Barclays Capital. “In order to bolster their capital ratios, banks will continue to issue a variety of flavours of Tier 1 securities, including fixed interest, preference shares and convertible instruments.

“Issuing equity is the most expensive option,” he said.

Given the current tumult in the wider credit world and the cautious sentiment in the equity markets, convertible bonds are likely to become a speedy, cost-effective and liquid financing alternative.

“2007 has been a great year for global convertible volumes and we expect more of the same in 2008,” said Mr Raghavan.

With liquidity in credit markets at a low ebb, private equity firms may increasingly look to initial public offerings as the swiftest exit route from investments made over the last three or four years.

John Crompton, head of EMEA equity capital markets at Merrill Lynch, said that IPO activity could be increasingly driven by private equity in the coming year.

Public equity markets are the least damaged of all of the major pools of capital. With private equity-driven takeovers hit by weakness in the credit market, corporates which were previously priced out of the market could become bidders again, using their equity as currency.

“This will see a wave of acquisition financing, providing a boost to equity capital markets activity,” Mr Raghavan said.

Copyright The Financial Times Limited 2007

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