Pipes intended for construction of the Keystone XL pipeline in Gascoyne, N.D. on April 22, 2015.Alex Panetta/The Canadian Press
Canadian investors are snapping up stock offerings this summer, providing domestic companies with the cash needed to expand globally without piling up debt.
In the past week, utility TC Energy Corp. TRP-T sold $1.8-billion of stock to fund construction of a pipeline that will deliver U.S. natural gas to southeast Mexico, while engineering company WSP Global Inc. WSP-T raised $800-million to acquire British environmental consultant RPS Group PLC. The two successful equity offerings ended a prolonged drought for new issues, and Bay Street bankers expect more companies to tap markets in the coming weeks.
Both TC Energy and WSP opted to sell stock rather than borrow more money at a time when interest rates are rising, in part to ensure credit agencies maintain their ratings, according to analysts.
TC Energy Corp. completes public offering of common shares
Last week, Calgary-based TC Energy sold stock to pay the equity portion of its planned Southeast Gateway Pipeline, a US$4.5-billion, 715-kilometre offshore project that will carry U.S. natural gas to southern Mexico. The new pipeline is expected to open in three years, and the utility will borrow to pay for the remainder of the project.
“Funding the equity upfront avoids the credit-rating pressure that TC Energy may have faced if it tried to carry US$4.5-billion of capital associated with Southeast Gateway without any revenue contribution until the project comes into service in 2025,” said a report from analyst Robert Kwan at RBC Capital Markets.
TC Energy has a number of larger projects under way, including the Coastal GasLink natural-gas pipeline in northern B.C., and analyst Robert Hope at Scotiabank said the company may sell assets, such as pipelines in California and New York, to further reduce debt.
“We generally do not see multiyear pipeline construction projects as having their required equity financed on day one,” said Mr. Hope in a report. “However, in this case, we believe it makes sense given TC Energy’s elevated credit metrics.”
This week, WSP established a new credit facility for $935-million to backstop the RPS purchase, a move meant to satisfy British takeover regulations. However, chief executive Alexandre L’Heureux made it clear that the Montreal-based company planned to pay for the acquisition – its third in as many months – with proceeds from the stock sale.
Major institutional investors committed cash to both the TC Energy and WSP offerings. For example, the Singapore sovereign wealth fund GIC, the Caisse de dépôt et placement du Québec and Canada Pension Plan Investment Board invested a total of $400-million in WSP.
Pension plans and other institutional investors are becoming increasingly common sources of capital for takeovers; these financings are known as private investments in public equities, or PIPEs. In a recent study, law firm Fasken found that the size of PIPEs is growing – the average stock sale was $113-million last year, up 18 per cent from 2020.
Fasken lawyer Grant McGlaughlin said PIPEs are expected to become increasingly common in share sales, in part because in choppy markets, companies want a seal of approval from a major institution when they try to sell stock. “Markets have been volatile and are likely to remain so, and PIPEs offer attractive protections for investors,” said Mr. McGlaughlin, co-leader of Fasken’s private-equity group.
“With COVID-19, the war in Ukraine, inflation and worldwide supply shortages creating continued uncertainty in the economy, capital markets are expected to continue to be volatile,” said the Fasken report. “A PIPE can act as an effective financing while securing a strategic partner, and in the case of those issuers facing tough times, allows for the raising of significant capital without selling the entire business at a depressed value – particularly in volatile markets.”
On Bay Street, the TC Energy and WSP stock sales were signs of life in what was a moribund market for new equity issues. Canadian companies raised just $2.8-billion in stock sales in the second quarter of the year, roughly 25 per cent of the average quarterly activity in the past decade and the lowest amount of equity fundraising since the early stages of the global financial crisis in 2008.
Investment bankers said the success of the TC Energy and WSP offerings is expected to kick off additional stock sales this fall from companies that make acquisitions or want to pay down debt.
RBC Capital Markets and Scotiabank led the TC Energy share sale last week. CIBC Capital Markets, National Bank Financial and RBC Capital Markets led the $400-million portion of the WSP share offering that went to public-market investors.
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Andrew Willis