UBS Says Europe Companies Ready to Restart Deals After Virus

(Bloomberg) -- UBS Group AG dealmakers said corporate capital markets will revive sooner rather than later and that the dislocation caused by the coronavirus has opened up some rare opportunities for investors.

Europe’s companies are positioning themselves to restart mergers and initial public offerings later this year after the coronavirus crisis eases, executives at the Swiss bank said in a joint call.

While sellers are mostly postponing new deals, some companies are using the time to prepare for auctions this summer, said Nestor Paz-Galindo, EMEA head of M&A at the bank. Deals that have been in the pipeline for the last six to nine months are still happening, he said.

“We will see more combinations,” said Paz-Galindo. “Companies with good balance sheets can try to take advantage of the dislocation of price and build scale. While the vulnerable companies are on the defensive and will try to defend against hostile takeovers.”

UBS said it’s seeing appetite from activists and other investors for equity sales. Countries recovering from the virus sooner, such as in those in Asia, are already starting to think about taking advantage of rock-bottom prices for deals in Europe.

Political Scrutiny

“There will be more political and regulatory scrutiny on deals that can be seen as opportunistic, especially on sectors deemed very important,” said Paz-Galindo. “We expect some pushback.”

Infrastructure is one sector that isn’t waiting for a recovery. The investment bank has seen maneuvering in the last three weeks that signal strong investor appetite.

“Investors have been more resilient than you would think,” said Gareth McCartney, UBS’s head of cash equity capital markets for EMEA. Many funds were already well positioned for volatility and generally underweight the oil and gas sector, which suffered a blow from both the coronavirus related shutdown and a sharp drop in crude prices.

Equity increases are in the works for companies with strong investor bases and a wave of initial public offerings planned ahead of Easter has been pushed back to the second half and into 2021, according to McCartney.

A decade-long boom in mergers and acquisitions ground to a halt in March as the pandemic sent stocks reeling and shut debt markets. Still, bond-market issuance and transaction levels are at record levels in some cases, as some of the biggest corporate issuers like Nestle SA and Royal Dutch Shell Plc bring liquidity to the market, European debt head Barry Donlon said.

Last week, corporate issuance increased 75%, Donlon said. “We have had a couple 120 billion dollar weeks in the U.S., and around 80 billion euros in the European markets.”

Cheap Debt

Companies with the highest credit ratings are taking advantage of the low interest rates in the U.S. to lock in longer-dated debt at cheaper rates, and that represents a rare opportunity for investors to have access to companies like Nestle that don’t come to the market often, he said. That has also helped stabilize and reverse some outflows from fixed-income funds, which saw more than $100 billion go out the door at the start of the crisis.

“The outlook for the corporate credit and bank credit markets, on the debtor side still feels pretty positive,” said Donlon. “People still feel that levels are attractive enough to compensate for the current market risk.”

Donlon expects banks to begin issuing CoCos and Tier 1 debt after an Easter blackout period, while corporations are increasingly considering hybrid capital like convertible bonds. The EU’s stimulus package, which includes the buying of corporate equity and hybrid capital, could play a role in the recovery for corporates and the cost of capital makes it interesting for subordinated debt to be issued, Donlon said.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.