A Federal Reserve decision that will let many banks pay dividends again is another sign that the equity markets have returned to health, and it likely will stoke investor demand for financials, according to Mary Ann Deignan, head of equity capital markets in the Americas for UBS.
The ability to pay out dividends will attract investors who were underweight on banks, and the return of capital to shareholders will differentiate U.S. banks from their "global peers," she said in an interview with an American Banker sister publication, Investment Dealer's Digest, last week.
Deignan has raised more than $100 billion in some of the largest U.S. corporate new issues (including Visa's $19.66 billion initial public offering). She said the better conditions are evident in other corners of the equity capital markets. For instance, more companies can access the public markets through IPOs, and more offerings are closing at their targeted range.
Before joining UBS in 2004, Deignan spent 11 years in equities and equity capital markets at Merrill Lynch. She started her career in leveraged finance at Bankers Trust.
Here are some excerpts from her interview at UBS' midtown Manhattan headquarters.
IDD: How are things in the equity markets, given what has happened in Japan? How has it changed the pace of IPOs or secondary offerings?
Mary Ann Deignan: There are a couple of ways to look at it. One is to assess all that has happened and conclude it's a bad environment for investing in new issues, because there is much more uncertainty than in the early weeks and months of the year.
The alternate view is to highlight the $4 billion of new-issue product that priced successfully last week against that same backdrop of volatile oil prices, unrest in the Middle East, and tragic events in Japan. That makes me say this market is strong and incredibly resilient. Investors are definitely more cautious, and not everything is going to make it over the finish line, but the U.S. market is doing well, and it's where you want to be right now.
IDD: Two companies pulled back their deals — was that issuer-specific? Or was their well-being tied to Japan's economy or other global issues?
DEIGNAN: No, not tied to Japan specifically. I think those two transactions reflect the fact that investors can be discriminating in volatile markets.
IDD: The banks returning money to investors — how big of an issue is that for the broader equity markets?
DEIGNAN: It's positive news on a number of fronts. The U.S. regulators are giving many of the U.S. institutions the "all clear" signal, if you will. The favorable results of the stress tests not only confirm that they are in better shape than they were in a few years ago, but also confirm they are in good enough shape to start returning capital to shareholders in the form of dividends or share repurchases. I think for bank investors, this will be a significant differentiator for the U.S. banks versus global peers.
Secondly, there are many investors who are underweight the banks. And now with the ability to initiate dividends and buybacks, there are two more reasons to want to own them again.
On balance, it's good for the market when bank stocks do well. They are a big part of the stock market, because of their sheer size and representation in the S&P, and they're a great barometer for the overall health of the economy.
IDD: Now that many banks are allowed to pay dividends, what does this mean for capital-raising activity?
DEIGNAN: Aside from Tarp repayment, much of which is already behind us, I think the focus will be shifting away from capital raising. Many banks, those with sufficient financial flexibility, will actually start to shrink their capital base. Share buybacks will allow these management teams to return what they view as excess capital to their shareholders. So it's really quite the opposite of a capital raise. I don't think we'll be seeing anything close to the bank new-issue levels we've seen in the last few years.
IDD: You must be seeing more in the way of financial sponsor activity?
DEIGNAN: Sponsor activity has definitely picked up this year, and I think sponsors will be a significant part of not just the IPO market, but the follow-on market and the block trade market, as well. Sponsors follow a life cycle with their fund investors. Part of that cycle is the return of capital.
In 2008 and 2009 and parts of 2010, that cycle was interrupted. It was not so easy to return capital to investors, because the markets were not really allowing monetizations either at the valuations or the pace at which they had become accustomed. That delay in monetizing an existing fund in turn impedes their ability to raise their next fund, as fund investors want to realize returns on older funds first.
We are now in a market where we have a couple of favorable things happening. The first is that valuations are generally higher today than in the past few years, so sponsor exits are more likely to generate good returns. Secondly, we are seeing the market broaden out. As management teams become more confident about the future, as profitability improves, different parts of the market open up. So sponsors are going to have broader access to the market than in the early stages of the recovery.
IDD: You mentioned block trades. How is that corner of the equity capital markets improving? Have they come back from 2009?
DEIGNAN: Yes, that's an active part of the new-issue market today. I think the biggest difference between today's block market and that of two years ago is pricing. In a very volatile market, like 2008 and 2009, a bid for shares has to reflect the volatility and risk of the market and is much wider than a bid in stable, predictable markets. So a 10% or 15% discount bid compensated for the lack of clarity on the market clearing price for shares the next day. Today that might sound extreme, but at the time the magnitude of swings in market direction on any given day was almost impossible to predict.
IDD: So this would be down 10% from the last quoted price of the share subject to the block trade?
IDD: Today the discount is roughly 3% to 4%?
DEIGNAN: It depends on the stock and the size of the block, but anywhere between 3% and 8% is common today.
IDD: What was the discount at the height of credit crisis?
DEIGNAN: As wide as high teens, maybe 20%, but no hard rule on that, as it always depends on the specifics of the stock and the size of the block.
IDD: When you bring a deal to market, are you doing anything different in setting price talk for a new issue?
DEIGNAN: Today we are much more optimistic that, at the end of a fairly lengthy but predictable IPO preparation phase, there will be an IPO market. Two years ago, we were threading the needle, waiting for a set of perfect market conditions, which often never arrived. We delayed discussions on valuation as long as possible, because the volatility in the market was such that a price range which made perfect sense in one week was irrelevant the next week; markets had moved, comps had moved.
The second thing we have at our disposal is a much more significant pool of data points out there, which actually tell us what the market will accept. There were almost 120 IPOs last year, so there's much less guessing. You can actually see where deals are pricing versus their range and how they are trading in the aftermarket. You can ask investors about their experience with new issues and what's working and not working for them. It's much more constructive to advise an issuer based on the market you have than on a market you hope you'll have.
IDD: Going back to price talk, are deals coming in at price talk?
DEIGNAN: Last year in the first quarter, about 55% of all IPOs priced below the marketed range, so below the initial price talk. This year so far, we are at about 35% which have come below the marketed range. The historic average is closer to 25%, so we're moving in the right direction.
IDD: What is the sentiment among buy-siders when you take deals out on road shows?
DEIGNAN: Thankfully, the buy-side mandate is to invest. So while they may at times choose to have higher cash balances, they are generally very focused on finding the next great investment idea. At the moment, IPOs are performing well and are generally outperforming the broader markets. So this year, if you have invested in IPOs, you are ahead of where you would be if you didn't.
Of course, no one buys every deal, and not all deals have done well. But if you look at IPOs as an asset class, they are outperforming. As long as that outperformance continues, the buy side wants more product. But as soon as the asset class starts to underperform, we feel the pushback, and that's when we know we're on the warning track.
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