Business financing | Capital still present

We suspected as much from the results of Canadian banks in recent quarters. Corporate financings through new equity and bond issues have been strong, and banks’ capital markets divisions have flourished over the past year. But will stock market volatility, the resurgence of inflation and rate hikes put a brake on these financing operations, which are essential to economic growth?

The strength of the post-pandemic economic recovery and the abundance of liquidity created by government relief measures and the extremely expansionary policies of the Bank of Canada were the main factors that facilitated corporate financing.

According to figures provided by Desjardins, 1,038 share capital transactions totaling $58.3 billion were carried out in 2021 in Canada, including 66 in Quebec for $8.3 billion. We have to go back to 2016 to find such a level of activity.

There are also 102 initial public offerings (IPOs) in Canada in 2021 for a total amount of $9.1 billion, the best of the last seven years.

And here comes COVID-19

Since the arrival of COVID-19, we have had two good years, although very different, explains Mathieu Talbot, vice-president, business services and corporate financing, at Desjardins.

In 2020, confirmation of the pandemic in the spring temporarily put a damper on fundraising activities as fears of bankruptcy mounted. But then governments moved quickly, and direct business relief measures as well as central bank liquidity injected into the financial system revived trading, which by then roughly equaled that of the previous two years.

Return of the effervescence

Then, in 2021, a better-than-expected economic recovery rekindled the excitement in the equity finance industry as the market easily absorbed whatever came its way.

With all this cash available and very low interest rates, the environment was ideal for financing the capital needs of all businesses, explains Martin Robitaille, Head, Corporate Financing Quebec, National Bank, Capital Markets.

As the economic web was buoyant, companies seized the opportunity to optimize their capital structure. “They have taken advantage of very low yields in the long-term bond market to lengthen their debt maturities and attractive valuations to issue equities,” he says. All the ingredients were there for a good year in 2021.

The reverse side of the coin

But will we know the other side of the coin this year, and will companies wishing to attract equity capital to grow their business be able to do so?

The economic outlook for 2022 includes a good deal of uncertainty, notes Mathieu Talbot.

Almost all observers agree that the Bank of Canada will begin a series of interest rate hikes in early March. As for the stock markets, they have been going through a period of worrying volatility since the beginning of the year.

And that’s without taking into account that the economy is grappling with severe supply chain disruptions, accompanied by a significantly higher inflation rate than what we have been used to for several years.

We should perhaps expect fewer transactions, underlines Mathieu Talbot. In a volatile environment, windows of opportunity tend to open and close more quickly, making it more difficult to complete trades. “But the good stories will continue to find takers,” he argues.

Capital supply remains abundant

As volatility negatively affects stock prices, corporate valuations become even more attractive to investors, which should encourage them to deploy available cash.

“Many people will not want to withhold their investments,” says Martin Robitaille.

Despite rising interest rates, inflation and volatility, the supply of capital will remain abundant and the environment promising for the corporate finance industry, he said.