European debt crisis takes its tolls on investment, buy outs and bank fees, data shows

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Written by Ray Clancy

Tuesday, 01 June 2010 08:19

Government debt crisis in Europe has halted a 14 month surge in sales of new bonds and shares, while mergers and acquisitions are at a nine month low, according to new figures.

The drop-off in capital markets and M&A activity is bad news for companies seeking to raise new funds or sell unwanted units, for buyout houses and entrepreneurs eager to cash in by bringing private firms to market and for banks.

The data from Thomson Reuters shows that global debt capital markets activity fell 58% from April, to hit $210 billion, the lowest since October 2008, the month after Lehman Brothers collapsed

It also shows that global equity capital markets activity halved from April to hit $30.6 billion, the lowest since February 2009 and although global M&A this year is 22% ahead of last year’s total, at $862.7 billion, May was the slowest month since last August, with $145 billion of announced deals

Michael Tory, the former Lehman Brothers banker who founded Ondra Partners, a London-based boutique described the situation as ‘post-traumatic stress disorder from 2008’ He believes that risk aversion has increased across the board as investors have lost confidence.

Greece’s debt problems, crystallised by an April 27 downgrade to ‘junk’ by Standard & Poor’s, have sparked intense scrutiny of Europe’s public finances. Investors are concerned fiscal-austerity measures might kill Europe’s nascent economic recovery and also worry about sweeping financial reform plans.

Some deals and capital raisings have been scrapped. Mirion Technologies, NewPage Group Inc and Smile Brands Group Inc all pulled US initial public offerings (IPOs) last week, while Allegiant Travel Co withdrew a $250 million junk bond sale.

On Thursday a trio of investors dropped plans to make an unsolicited bid for Britain’s only listed ports company, Forth Ports Plc, citing ‘economic uncertainty’.

The data for May showed European ECM activity plunged 82% to $2.7 billion, while debt issuance also collapsed. In M&A, Europe’s share of global deals is 24%, well below its historical average.

‘Europe is the area of maximum uncertainty at the moment. That’s likely to defer any significant recovery in the M&A market and to make capital raising harder,’ said Mark Aedy, head of investment banking for Europe, the Middle East and Africa at Moelis & Co.

Aedy said M&A was likely to remain subdued for longer than anticipated at the start of 2010, but Europe’s difficulties could lead to a ‘very significant’ rise in restructuring work, involving states, banks, and struggling corporations.

Nevertheless, many companies have already refinanced and are enjoying improving earnings. Enormous demand from investors keen to boost meagre returns should also help future debt and share issues when market turbulence calms.

‘Notwithstanding the current volatility, markets are open. Liquidity is there and a number of transactions can get done. ‘We expect a pick up in new issue volume across both credit and equity market as soon as market conditions stabilise and volatility comes down,’ said Francois-Xavier de Mallmann, head of Goldman Sachs's European financing group.

For investment banks, the pullback spells a drop in fees. Freeman & Co estimates DCM fees are at their lowest since December 2008, and M&A fees are at a 12-month low.