Finance

European Finance: The Big Thaw


The chief financial officers at some of Europe's largest firms have had a busy few months. Since markets started to recover in early summer, executives from companies including German retailer Metro (MEOG.DE) and Anglo-Australian miner Rio Tinto (RTP) have hit up investors for extra funds. And in the past two weeks, French banks Société Générale (SOGN.PA) and BNP Paribas (BNPP.PA), as well as Italian counterpart UniCredit (CRDI.MI), have announced rights issues set to raise billions of dollars.

The fact that corporations are refilling their coffers is the latest sign the worst of the Great Recession may now be over. Indeed, data provider Dealogic (DL.L) estimates European companies have taken in almost $221 billion through rights issues and initial public offerings so far this year. That's just below the $228 billion raised in all of 2008, which analysts expect to be surpassed by the end of 2009. Firms also have bagged $1.1 trillion through corporate bonds so far this year, vs. $865 billion during all of 2008. Nonfinancial companies—still suffering from banks' high lending fees—have scored almost two-thirds of their funding from the resurgent corporate bond market.

The flurry of activity is a win-win for companies and investors alike. For recession-hit firms, the extra cash helps bolster sagging balance sheets and provides ammunition to snap up merger-and-acquisition targets at continuing knockdown prices. And for gun-shy investors—many still hoping to recoup losses from the past two years—the chance to lock in attractive corporate bond yields and grab equity stakes amid rising markets is too good to pass up.

"It's mutually beneficial for both sides," says Mike Lenhoff, chief strategist at stockbrokers Brewin Dolphin (BRW.L) in London. "Companies are looking ahead to take advantage of the gradual recovery, and investors' appetite for risk is slowing returning."

Time to Repay Nothing epitomizes the trend more than French banks BNP Paribas and Société Générale. Though they sidestepped many of the problems caused by toxic financial products, the banks accepted a combined $12.7 billion bailout from the French government last year when market sentiment was at its lowest. Now, BNP expects to raise $6.4 billion and SocGen $7 billion through rights issues. The goals: to repay government funds, which came with increased regulatory oversight, and to improve their tier-one capital ratios, a key indicator of financial strength.

Another promising sign of recovery is the tentative revival in IPOs. According to the PricewaterhouseCoopers IPO Watch Europe Survey, which monitors new listings Continent-wide, 44 companies raised $2.7 billion in the third quarter of 2009, compared with 28 new listings for a combined $680 million the previous quarter.

The bandwagon looks set to continue. British insurer Aviva (AV.L), which has businesses across Europe and in the U.S., announced plans Oct. 5 to float a minority stake in its Dutch subsidiary, Delta Lloyd, for an estimated $1.5 billion. The deal will be Europe's largest IPO so far this year, and Aviva plans to use the cash to pick up depressed assets across Europe.

"There's cautious optimism about an IPO market recovery," says Richard Weaver, a partner in PwC's capital markets group. "We continue to believe there will be a substantial pickup in activity in the first half of 2010."

A Return of the Bulls That optimism is already reflected in European stock market performance. After abysmal results in 2008—the FTSE 100, for instance, fell 31%—the past six months have brought back the bulls. The FTSE 100 hit a 12-month high of 5,261 on Oct. 14, while most other European indexes have posted double-digit gains since the start of the year. Under the circumstances, says Brewin Dolphin's Lenhoff, "no one wants to be left out." He adds European company valuations have, on average, returned to pre-credit-crunch levels.

But while some buyers are jumping back into equities, memories of the downturn remain fresh—especially among institutional investors. For them, risk management is the name of the game. David McCourt, senior policy adviser at the London-based National Association of Pension Funds, a trade body, says corporate bonds from investment-grade companies offer lucrative yields and, more important, less volatility than the equity markets. "They generate solid returns with a less risky downside," he says.

Not everyone is benefiting from the recovery in the capital markets, though. Analysts note that small and medium-size firms, particularly domestically focused manufacturers, are still having trouble raising money. With European unemployment rising and consumer spending at a 10-year low, investors view many of these firms as risky propositions. As a result, many such companies are forced to tap cash-rich hedge funds for financing—but the opacity of such deals could expose their other shareholders to increased risk. Says Simon Gleeson, a partner at law firm Clifford Chance: "That type of corporate financing is nontransparent and is happening in a major way."
Scott is a correspondent in Bloomberg Businessweek's London bureau.

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