H1 2020 Capital Markets Watch
While much of the business world has been disrupted by the COVID-19 pandemic and sudden recession, IPO activity in the first half of 2020 was down only slightly from the same period last year, inviting the question of just where companies are going public. After IPO issuances came to a near-halt in late Q1 and early Q2, the window opened wide in June, when much-needed liquidity infused the markets and led to the strongest month for IPOs in 13 years. Looking ahead, equity investors are likely to continue as active participants in the IPO market as the economy begins to recover.
The S&P 500 reached record highs in February before the spread of COVID-19 led to a swift plunge of 34% over 23 trading sessions. In response, the Fed took unprecedented action by reducing interest rates to near 0% and committing to directly purchase corporate bonds, mortgage-backed securities and treasuries.
Investors have begun to price in the long-term equity market recovery. The S&P 500 has since rebounded from its mid-March drop of (34%) to a year to date (YTD) return of (4%). Meanwhile, the tech-heavy NASDAQ reached all-time highs in June, closing above 10,000 and returning 12% YTD.
US IPO market rebounds after months of relative quiet
The IPO market in the first half of 2020 was very much a tale of three parts:
- The months leading up to COVID-19 saw steady IPO volume, led by three megadeals.
- During the initial shock of COVID-19, the IPO markets closed for most sectors in an environment of extreme market volatility, although some biotech companies and special purpose acquisition companies (SPACs) made their debuts. Significant volatility in the US stock market triggered numerous circuit-breaker downside protections. This heightened volatility makes the IPO valuation process very difficult, which causes many IPOs to defer their listing plans until the markets become more stable.
- Several months after COVID-19 hit, IPOs returned to the market in June with a broader range of sectors amid recovering issuer and investor confidence.
Compared to the second half of 2019, the total number of issuances remained relatively flat, but 2020 proceeds were up more than 50% despite periods of high volatility. Compared to the first half of last year, the first half of 2020 saw only a slight reduction in IPO activity, with the 2020 market pricing seven fewer IPOs and raising 8% less in proceeds.
During the first few months of the pandemic, most IPO activity was driven by SPACs and biotech; together they accounted for 83% of all IPOs from March through May, as their valuations are more milestone-based and therefore more resilient to market volatility. Equity markets also saw seven IPOs raise in excess of $1 billion from five different sectors, representing the most megadeal sector diversity since 2011, and an interesting deviation from the typical dominance of technology, media and telecommunications (TMT).
SPAC attack
US IPOs were dominated by issuances from the pharma and life sciences (PLS) and SPACs sectors in H1’20. PLS IPO volume was flat compared to H1’19, with biotech comprising more than 80% of all PLS volume, while PLS proceeds were up 148%.
This year has seen record highs for SPAC volume and proceeds, with 37 SPACs raising $10.7 billion. SPACs have accounted for 40% of IPO volume and 33% of IPO proceeds in 2020, nearly doubling the share that SPACs typically comprise. This trend includes an increasing number of serial SPAC issuers and the first-ever SPAC megadeal.
US follow-on activity in 2020 included 406 offerings that raised $125.6 billion, which was the highest proceeds gained in the first half of a year in more than 30 years, at an average discount of approximately 10%. Investors continued to buy into the relatively less affected sectors like PLS and financial services.
Bond markets outperform as companies seek to fortify balance sheets
The US bond markets saw frenetic activity in the first half of 2020, despite the impact of COVID-19 and related global headwinds. Like the equity markets, bond markets had somewhat of a roller-coaster ride, although the investment-grade bond market seemed to shrug off COVID-19 fears after the Fed announced a primary and secondary market corporate credit facility for up to $750 billion. The high-yield bond market also had a very strong first half, with $202 billion raised over 300 issuances, which is a 40% increase in proceeds raised and a 38% increase in issuances from H1’19. The second quarter in 2020 was the strongest quarter in the past five years. Only one-eighth of high-yield issuances priced at a discount, with the median issuances yielding approximately 6%. The consumer markets sector led the way for high-yield bonds, followed by the industrial products sector.
Investment-grade issuers raced to the markets and reached the $1 trillion mark in only six months – twice the pace of 2019’s investment-grade bond market. The investment-grade bond markets raised more than $1.2 trillion in proceeds over 1,250 issuances, which was up 103% and 69% from H1’19, respectively. Almost three-quarters of issuances priced at a discount in a crowded market, with the median issuances yielding approximately 3.1%. The financial sector raised the most proceeds, followed by the energy, utilities and mining sectors.
With IPO and follow-on volumes driving the capital markets to historic levels, equity investors are likely to continue as active participants. Positive investor interest allowed many companies to price during the pandemic with adapted marketing strategies, including virtual roadshows—which may continue long into the future. Issuers that postponed their IPOs will continue to closely monitor investor appetite for upcoming deals as COVID-19 continues to loom in the background and an election draws closer. The critical factors to monitor will be upsized issuances, pricings at the top or above the range and relative valuations. The market volatility in the first half of 2020 is a very real reminder of what an IPO “window” means for issuers. US bond markets should continue to be active as companies build cash reserves to be ready to respond to increased short- and medium-term uncertainty. Interest rate spreads have seen a spike over the past six months and are slowly returning to their pre-COVID-19 levels, although many issuers find themselves facing ratings downgrades.
The economic fallout from COVID-19 has ended the longest US economic expansion on record. Over the last few months, the stay-at-home measures to control the spread of the virus have led to a surge in layoffs and a collapse in spending, historic in both size and speed. While monetary and fiscal response has been equally unprecedented, the risks continue to weigh to the downside. Given the challenging environment, we expect the real GDP for 2020 to contract by 8%.
GDP growth will likely rebound in 2021 as policy support gains traction and consumer and investor confidence recover. However, high unemployment and rising corporate debt could lead to a wave of defaults that could prolong the recovery. Our baseline expectation is for economic growth to reach 5% in 2021, as monetary and fiscal policy remains highly accommodative for an extended period.
Chris Benko
Managing Director, PwC Intelligence Organization Leader
Please note: IPOs with deal values that are less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded from the above narrative. Debt issuances in the above analysis are US marketplace tranches, denominated in US dollars, and exclude collective instruments. All data is as of June 30, 2020.
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