European equities stayed strong in 2015 despite events in Greece and China. Klauss Hessberger and Achintya Mangla, co-heads of European ECM at JP Morgan, talk to Michael Watt about their team's activity during these tricky periods. 

When turbulent times hit the capital markets, as they have done with some frequency this year, the temptation for all participants, whether they are bank bookrunners, investors, or the issuers themselves, must be to put on a tin hat, dig in, and hope to ride out the danger without taking too much of a beating. 

Credit, then, to JPMorgan’s European equity capital markets (ECM) team, co-headed by Klaus Hessberger and Achintya Mangla in London, for plugging away and getting several major clients' deals done during that period. “Until the Greek crisis, it had actually been a fairly sedate year for ECM in Europe. From volume perspective it was probably equal to the year before. There was a good level of activity in initial public offerings [IPOs], merger and acquisition [M&A] financings, capital raising and placements. The market was derailed slightly by the Greece news in the summer, but those were the busiest weeks from our perspective as we led 10 ECM transactions during that time," says Mr Hessberger. 

Amid the drama 

The latest bout of Greece’s troubles kicked off in late June when, with the country again struggling to repay its creditors, its government called a referendum on the bailout conditions proposed by the European Commission, the International Monetary Fund and the European Central Bank. Billed as a de facto vote on Greece’s membership of the eurozone, and possibly the EU, the referendum took place on July 5 and created huge uncertainty in the markets. In the end, the Greeks accepted the bailout conditions by a large majority, but tensions rumbled on throughout July as the final details of the bailout were agreed and voted through by the Greek parliament.

In the midst of all this drama, JPMorgan’s ECM team managed to get several sizeable deals away. According to data provider Dealogic, between June 26 and July 17, for deals worth more than $100m, the team secured issuances worth over $2.4bn in total, more than twice that of its nearest rival, earning a market share of just over 20%. In the process, the team brought in net revenue of $43m, more than twice that of any other firm. 

For Mr Hessberger, this performance is testament to the underlying strength of the European equities market. “The transactions we did performed well in the after market, despite all the volatility over the summer. That showed there will always be good support for the right deals, if the issuer can present a solid case to investor. Rates are obviously still very low, so there is a strong tendency for investors to look to equities for better returns, rather than fixed income,” he says. 

Mr Mangla also points to the strength of the ECM franchise at JPMorgan as a factor. "We are very proud of the reach of our business – are privileged to have world-class advisory capabilities and relationships with both issuers and investors. We are in constant dialogue with clients, sometimes with good news and at times with a cautious message. [This is] part of the job and it is very important to us that we share our best judgement, even if that is not what everyone wants to hear," he says.

Deal frenzy 

On June 26, the day that the Greek referendum was announced, JPMorgan and three other bookrunners brought an IPO from Sophos Group, a cyber security firm, to the market. Sophos raised $125m from the free float of a 35% stake in the business, and its shares have held their value fairly effectively since the issuance.   

Also on June 26 came a €500m convertible bond offering from European aerospace giant Airbus, the first of its kind for the issuer, with JPMorgan acting as joint global co-ordinator. Three days later, on June 29, the bank’s ECM team took an IPO from Swedish healthcare provider Capio AB to market, valued at €250m. 

The deals continued to come thick and fast throughout the first couple of weeks in July, despite continued uncertainty from Greece. On July 1, German residential landlord group Deutsche Annington Immobilien launched a €2.25bn rights offering to aid the purchase of rival firm Suedewo. The offering came almost exactly two years after the firm’s IPO plans were put on hold at the last minute by a speech by the then Federal Reserve chair Ben Bernanke that suggested an end to US quantitative easing. 

“In the case of the Deutsche Annington's M&A-related equity raising, the issuer had experienced the effect of volatile capital markets in the past, so it was used to executing deals under challenging circumstances. Many companies want to push on through with deals even in volatile environments because, particularly with IPOs, they take a huge amount of time and effort to put together. They distract management from the day-to-day running of the business, so it can be better to get the deal done even if it’s a slightly smaller deal or at a marginally lower price, rather than postpone it and prolong the whole process even further,” says Mr Hessberger.

A hard August

By the end of August, firms that went ahead with equity issuance during the Greek turbulence could perhaps look back with some satisfaction. That month saw massive disruption in global equity values due to a severe sell-off in China. Bearish attitudes seeped into developed world stock markets, aided by the lacklustre growth in other emerging market economies.   

“China came as a surprise to the market,” says Mr Hessberger. “It probably shouldn’t have had such a big impact on European equity markets, but the timing was unfortunate. In August, volumes are normally down 50% because lots of people tend to be away. Liquidity is generally poorer, so any negative news can create a lot of volatility. There was a fair bit of panic around China, but, as with Greece, it didn’t disturb the underlying structural strength of European equities.” 

There is another theory, proposed by some market participants, that by flaring up in the quiet days of August, China’s stumble saved equity capital markets some headaches. By the time everyone was back from holidays, the market had returned to an even keel and the issuances inked in for September and October could go ahead as planned. Contrast this to 2014, when a bout of volatility in September wrecked the timetable for many deals and made the fourth quarter of that year exceptionally quiet in ECM. 

It is a theory that Mr Hessberger has some sympathy with, and he and Mr Mangla expect the year to close on a positive note. “Volumes are slightly better year-to-date compared with last year, with a different mix of IPOs, rights and follow-on. There is no sign of investor appetite waning for the right equity story at the right valuation and this is key. With positive fundamentals in Europe, the Middle East and Africa, including a benign rate environment, we are feeling better now than we were at the same point last year. Things look good for 2016 but obviously if volatility continues then the IPO pipeline will be in different place, but we remain positive on the market,” says Mr Mangla.

Capital markets union  

Away from the markets, one of the most significant events in European ECM over the past few years has been the promotion by the EU’s movers and shakers of a capital markets union (CMU) that, it is hoped, will free up investment for corporates and make them less reliant on bank lending. 

On September 30, the European Commission launched its CMU ‘action plan’, with a focus on expanding the investment universe to member state companies. The seriousness with which the project is taken by EU bodies was highlighted when Lord Jonathan Hill, the European commissioner for financial services, announced recently that the European Commission is prepared to relax key aspects of bank regulation to ease its implementation. 

The CMU has been a long time in the making, and no one expects it to materialise quickly. Once established, it may not lead to an ECM boom. The issue is not investor demand. There is plenty of that, say Messrs Hessberger and Mangla. Rather, it is a case of corporate preference for bond markets over equity markets. “In general, European firms are under levered relative to their US peers. Very broadly speaking this offers greater flexibility to access the public bond markets to diversify away from the bank market,” says Mr Mangla.

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