People walk past a Canada Goose billboard near the new store in Beijing, China, on Dec.15, 2018.GREG BAKER/AFP/Getty Images
A US$652-million share sale by Canada Goose Holdings Inc. imploded after the chief financial officer of Huawei Technologies Co. Ltd. was arrested in December, creating steep losses for the deal’s underwriters – particularly lead investment bank Credit Suisse Securities.
On Nov. 26, Canada Goose announced an offering of common shares that allowed its private-equity backer, Bain Capital, to unload stock it held in the company at a high price. Ten days earlier, Canada Goose shares had hit an all-time high of US$70.05.
Early on, the deal seemed to be in good shape, with Canada Goose’s share price rising above the US$65.15 offer. (Deals that investors don’t like typically result in a falling stock price.)
A week later, an earthquake hit: the news broke that Canadian authorities had arrested Huawei CFO Meng Wanzhou while she was travelling through Vancouver, and Canada Goose’s stock price quickly cratered.
The retailer’s jackets are popular in China and Canada Goose was on the cusp of opening its first flagship store in Beijing, but analysts feared its earnings growth would suffer materially should the Chinese shun Canadian products because of the arrest. Over the span of three weeks, Canada Goose shares lost 40 per cent of their value.
Because the underwriters, Credit Suisse and Canadian Imperial Bank of Commerce, were still holding shares when the price started to fall, they faced the possibility of losing millions of dollars. That scenario has played out for Credit Suisse, which sold its stock at depressed prices, losing millions of dollars in the process, according to someone familiar with the transaction.
On Friday, Bloomberg News pegged the loss at US$60-million. Credit Suisse declined to comment for this story.
It is unclear if CIBC also sold its shares and the Canadian bank did not return a request for comment. But it did not face the same pressures as Credit Suisse.
For one, Credit Suisse has a fiscal year end of Dec. 31, which gave executives reason to absorb the loss during that reporting period, rather than wait for a potential rebound in Canada Goose’s share price. CIBC is not necessarily in the same rush.
But even if CIBC did sell its shares, the bank’s exposure to the deal was much smaller.
Typically, Canadian companies raise equity using “bought deals,” in which a group of underwriters buy their stock and then resell it to public investors. While the risk rests with the underwriters, it is usually syndicated, or spread, across a number of them.
In this deal, Credit Suisse bid aggressively to win the business, according to people familiar with the process. Credit Suisse was happy to underwrite 90 per cent of the offering, putting its exposure at US$587-million. CIBC only had a 10-per-cent sliver – even though it was the lead underwriter on Canada Goose’s initial public offering in 2017.
Credit Suisse also agreed to collect only a 1-per-cent underwriting fee. Usually, fees in Canadian bought deals hover around 3.5 per cent to 4 per cent. For this offering, the total commission available to the underwriters was US$6.3-million, according to the prospectus for the deal.
The banks likely accepted the fee because the deal was predominately a U.S. offering. In the United States, share sales are often conducted as “block trades,” not bought deals. In block trades, investment banks are used to receiving a fee of 1 per cent or less for finding people to buy the shares.
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