Bankers wary despite jump in US corporate fundraising

US corporate fundraising picked up sharply in the first half of 2024, but bankers are growing increasingly cautious over whether the revival will continue as uncertainty over the presidential election and the timing of interest rate cuts casts a shadow over the rest of the year.

Fundraising activity jumped in the first half of 2024, with borrowing in US high-grade and junk-rated debt markets up almost 50 per cent to $1.3tn, according to PitchBook LCD. Fundraising through initial public offerings jumped 80 per cent to almost $20bn, according to Dealogic.

But bankers say that part of that activity was driven by companies pulling forward their financings in order to avoid potential volatility later in the year, and some are not convinced that it represents a return to more normal conditions.

“Activity levels are going to be fairly muted for the rest of the year,” said Richard Zogheb, Citigroup’s head of global debt capital markets, pointing to above-target inflation, rates not falling until later this year and the election as factors.

“We’re going to be chasing anything and everything [in terms of deals] that we think has any chance of getting across the finish line,” he added.

Mark Lynagh, global head of investment grade finance at BNP Paribas, said that while there would be “good windows of activity” in the second half, he expected volumes to be lower, although he added: “I don’t think things are going to stop, absolutely not.”

Activity in public credit and equity markets — a critical driver of investment banks’ revenues — dropped precipitously when the Federal Reserve began raising rates in 2022. IPO volumes fell by more than 90 per cent in 2022 from the previous year, while corporate debt issuance fell by almost 40 per cent. Junk-rated bond and loan issuance dropped almost 70 per cent, although high-grade borrowing, which benefits from more consistent access to funding, was more resilient.

The rebound in borrowing this year has been helped by strong investor demand, which has allowed companies to borrow at relatively cheap premiums above benchmark government bonds, even as the Fed held its benchmark interest rate at a 23-year high. Investors have been keen to lock in yields before the central bank begins to cut rates, expected later this year.

Among high-grade bond deals in recent months is a $10bn sale by Home Depot to help fund its acquisition of building products distributor SRS Distribution, and a $15bn issuance by pharma company AbbVie in February to help finance its purchases of ImmunoGen and Cerevel.

However, in low-grade debt markets much of the recent issuance has been done to refinance existing debt, rather than new borrowing for mergers and acquisitions.

While activity was “definitely” higher, said Citigroup’s Zogheb, “We’re comparing ourselves to ridiculously low volume periods. A small pick-up versus incredibly depressed activity levels in 2022 and 2023 is not what we were hoping for, and not what will sustain the kind of issuance volume we need.

“We cheer each one of those [deals that have happened], but they’re few and far between.”

In equity markets, meanwhile, there have been few of the high-profile deals by fast-growing tech companies that dominated the IPO landscape before the recent downturn, but there has been a steady stream of share sales, including billion-dollar offerings from cruise operator Viking, Arc’teryx owner Amer Sports and safety testing group UL Solutions. Follow-on share sales by listed companies climbed almost 40 per cent in the first half to $75bn compared with a year earlier, according to Dealogic.

Banks have earned roughly $3.8bn on US equity deals so far this year, according to Dealogic. If that rate were to continue in the second half, full-year revenues would exceed the pre-coronavirus pandemic average.

“The overall fee pools [earned by banks] are exceeding the expectations that most would have had entering 2024,” said Jesse Mark, global head of equity capital markets at Jefferies.

But, as with the bond market, recent volumes have been boosted by companies keen to complete deals early, say bankers.

The second half is expected to start with a bang, with warehouse operator Lineage due to list in July in the largest IPO of the year to date. Mark expects a busy period of follow-on equity sales starting in mid-July, once companies have reported their second-quarter earnings. Bankers are also hopeful of a handful of listings in September — traditionally a busy time of year for IPOs.

However, the window for both IPOs and follow-on sales is likely to be shortened by the election in November, while huge swings in market expectations of when and how quickly the Fed cut rates has made it difficult for IPO candidates to confidently forecast their future earnings.

“One thing we do know is the election will be distracting,” said Jill Ford, Wells Fargo’s co-head of equity capital markets. “There will be some [IPOs] in September,” she added, “but many people will wait until early next year.”

Others too are already looking past a tough second half to 2025.

“We’ve steadily built some progress,” said a senior IPO banker at one of the largest Wall Street banks. “But a ‘normalised’ . . . IPO market? We’re not there yet. There’s a decent chance we’re not there until next year.”