As we approach the sixth anniversary of the global financial crisis, our report this year examines the current state of some of the key sectors in North American capital markets.
Public capital markets in North America appear to be rebounding with strength. May saw the announcement of one of the largest public offerings in Canada—Bank of Nova Scotia’s sale of C$2.3 billion in shares of CI Financial by way of a bought deal. U.S. public markets have been very active—2013 was one of the strongest U.S. IPO markets in recent memory and positive trends continue into 2014. Despite continued scrutiny of the fairness of the public markets, and claims like those from Michael Lewis that the stock markets are rigged, investor confidence appears to be building, and recent regulatory initiatives, such as the implementation of the JOBS Act in the U.S. and the liberalization of marketing rules in Canada, have proved successful in creating a friendlier regime for companies looking to access North American public markets. Forthcoming changes in the Canadian private placement market are also expected to increase financing options for pre-IPO companies.
For Canadian banks, the preferred share market has finally re-opened over a year after the Basel Committee implemented requirements on non-viable contingent capital (NVCC) designed to reduce systemic risk. In the first five months of 2014, Canadian banks raised C$2.0 billion in preferred share offerings. The first offering of NVCC subordinated debt, however, is yet to surface and we expect the new rules will result in significantly less subordinated debt raised by financial institutions in Canada. While preferred share offerings by Canadian financial institutions have been well received by the market, mining companies have faced constraints raising sufficient traditional equity and debt capital and have increasingly been turning to streaming transactions, attracting investors outside the traditional stream space, such as pension funds and private equity firms.
Alongside encouraging activity in North American capital markets, some sectors continue to face regulatory uncertainty. Reform related to over-the-counter derivatives, often cited as an aggravating factor of the 2008 financial crisis, continues to drag. Similar to the U.S. experience under the Dodd-Frank Act, progress in establishing a comprehensive Canadian regulatory regime has been slower than expected. In the Canadian mortgage market, securitization programs sponsored by the federal government provided critical liquidity during the financial crisis. Current levels of government support are unlikely to go on indefinitely, but before the government can reduce its support, a more robust private market will need to develop. In the U.S., the trend toward inversions—transactions in which a U.S.-based multinational company lowers its overall effective tax rate by expatriating to a low-tax jurisdiction—appears to be accelerating. Some believe this surge may indicate that the window of opportunity for inversions may vanish as U.S. lawmakers apply greater scrutiny to these transactions.
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