League tables, the charts that are every investment banker’s favourite way to establish bragging rights on Bay Street, don’t tell the whole story of what is happening this year in Canadian capital markets.
Two massive, strategically significant deals played out in the first six months of 2018: A $4.3-billion sale of Canadian Natural Resources Ltd. stock by Royal Dutch Shell PLC and a $1.7-billion equity offering from Bank of Nova Scotia. Neither of these landmark transactions made it into the league tables published by data services Thomson Reuters and Bloomberg, for technical reasons that I’ll come back to in a moment.
First, here’s why those two deals mattered. Shell needed to complete its exit from the Alberta oil sands and redeploy its capital on developing new reserves, while Canadian Natural was anxious to find a more permanent home for a block of stock that everyone knew would eventually be sold and was overhanging the market. Scotiabank, meanwhile, needed to raise capital to fund a series of acquisitions, such as buying a bank in Chile and Canadian wealth managers Jarislowsky Fraser Ltd. and MD Financial Management.
“These were very large financings, done at extremely tight discounts to market and with broad institutional support,” said John McCartney, managing director and head of global equity capital markets at Scotia Capital Inc. “These transactions demonstrate that there is a great deal of global equity capital at the ready to support blue chip companies who are delivering against well-articulated growth strategies.”
While these stock sales were critically important to the companies and investment banks that staged them, Thomson Reuters and Bloomberg have well-defined rules on what does and doesn’t qualify for inclusion in their league tables.
One regulation is that an equity offering must include a prospectus. Shell didn’t need to file one when it sold an 8-per-cent stake in Canadian Natural – the oil company was able to announce the deal by simply issuing a press release. So the transaction doesn’t show up in league tables, even though it is the largest secondary share offering seen to date in Canadian markets. Scotia Capital advised Shell on its options, and Goldman Sachs & Co., RBC Dominion Securities Inc., Scotia Capital and TD Securities Inc. led the transaction.
Traditional league tables also refuse to count stock sales that an investment bank leads for its parent, which eliminates Scotia Capital’s $1.7-billion mandate from Scotiabank. And that was the largest treasury financing seen so far this year.
A rival data service called Dealogic uses an approach that ropes in more transactions, including the share sales by both Shell and Scotiabank. Using Dealogic’s methodology, Scotia Capital was the top-ranked Canadian dealer in equity markets through the first six months of the year, moving $3.4-billion worth of stock. Goldman Sachs jumps from the bottom to the middle of the pack because of its work for Shell.
If you eliminate those two big equity offerings, BMO Nesbitt Burns Inc. takes top spot for the first half of 2018, as the lead underwriter on 27 stock sales that raised a total of $1.8-billion. Scotia Capital ranked 10th, and Goldman Sachs was 20th.
The Shell and Scotiabank equity sales showed the Canadian capital markets functioning at their best. Shell was able to take advantage of improving investor sentiment around energy stocks and quickly exit its year-old stake in Canadian Natural, paying dealers a skinny fee of 20 cents per share. Scotiabank got the money it needed to expand both its South American franchise and its domestic wealth management business, a sector that investors reward with the highest price-to-earnings multiple.
In a relatively quiet period for stock sales – Thomson Reuters data shows underwriting activity is down 36 per cent in the first half of 2018, compared with the same period last year – the Shell and Scotiabank offerings were the biggest equity deals to play out in Canada. They generated significant fees for dealers. They’re the story of what’s happening in capital markets.