TORONTO, October 4, 2006 — Income trusts pulled the market for initial public offering (IPO) activity down dramatically in the third quarter of this year, a survey of Canadian equity markets from PricewaterhouseCoopers (PwC) revealed today. The value of new issues fell to $650 million in the third quarter from an average of about $2 billion in the first two quarters of 2006 and $2.6 billion in the third quarter of 2005.
But the slide does not signify the beginning of a downward trend for the IPO market in Canada, according to Ross Sinclair, national leader for PwC’s IPO and income trust services, despite new issue activity at less than half the pace of the previous two quarters of 2006.
The total number of new offerings on the TSX and TSX Venture Exchanges rose slightly to 32 in the three-month period ending September 30, 2006, up from 31 during the same period of the previous year.
The change in activity was most pronounced in the area of income trusts, which accounted for just $374 million of the total new issues versus $2.5 billion in the third quarter of 2005. In previous surveys, income trusts have represented the majority of new issues.
“When the market for new income trust issues declined, it took the whole IPO market with it,” Sinclair says.
Year-to-date IPO results were $700 million below the 2005 pace of $5.4 billion. For the first three quarters of 2006, there were 94 new corporate and income trust issues on Canadian exchanges, for a value of $4.7 billion (versus 87 issues totalling $5.4 billion in the same period of 2005). Just over $3 billion of the 2006 total were new income trust units.
Numerous factors conspired to constrain new issues in the quarter, Sinclair says, but the general market decline combined with higher interest rates particularly weighed down the market for new income trusts. “The income trust market might withstand either market volatility or higher interest rates, but not both,” Sinclair maintains.
With the potential for further interest rate increases easing, the interest-sensitive market for income trusts could yet stage a recovery in the fourth quarter. With significant new offerings in the pipeline, Sinclair believes the lull in activity will be short-lived.
“The market for income trusts has matured a great deal in the past two years,” Sinclair adds. “With the initial rush over and the credibility of new players like Telus arriving, we should start to see a certain amount of stability. No one sees the third quarter as a trend.”
The TSX Venture Exchange was particularly active during the quarter with 18 new issues, largely driven by small mining companies.
“The strong metals prices from the first quarter of 2006 have created a great deal of activity in the venture markets,” observes Paul Murphy, leader of the PwC mining practice. “Easier access to funds has driven the global boom in exploration spending. Although the value of issues was relatively small, the amount of activity in the junior mining sector points to the amount of interest in some of these commodities.”
The third quarter saw a continuation of Canadian technology and media companies listing on London’s Alternate Investment Market (AIM) with one joint TSX new issue for JumpTV Inc. raising $66 million — the largest new corporate issue in the third quarter. “We are seeing a number of our clients exploring new listings on the AIM to take advantage of strong valuations and reduced regulatory demands,” says Ben Kaak, PwC’s national technology practice leader. “We anticipate this trend to continue as the AIM matures and gains recognition in Canada’s technology and media sector.”
The largest new income trust during the period was Petrowest Energy Services Trust at $140 million.
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Survey of Canadian IPO Capital Markets
January 2006 – September 2006
