MAYBE it’s human nature when times are uncertain, but when corporate finance players in Perth were asked to comment on market trends over the past year, most had a glass half-empty perspective.
While the state’s economy continues to record strong growth, driven by energy and resources projects and ties to China, there are many dark clouds lying above.
Clifford Chance partner Paul Vinci is concerned that the negatives will only get worse.
“The ongoing uncertainty in Europe, coupled with the continuing waves of regulation generated by the last financial crisis, is having a profound effect on the world’s capital markets,” Mr Vinci said.
“This year we have only seen the tip of the iceberg – as new regulation comes in, banks will increasingly review their product lines and it is possible that some will move away from traditional lending.
“In tandem, banks affected by the ongoing market uncertainty are changing their strategies and the markets have become more difficult places to raise capital for all but the very highest-rated companies.”
Gresham Advisory Partners managing director Justin Mannolini shares these concerns.
“The impact of Basel III (banking regulations) on the availability of debt should not be underestimated,” he said. “For example, under Basel III, project finance exposures are treated quite punitively, and several European banks that have been active in that sector could well withdraw, making capital raising by resource developers more challenging.”
Mr Mannolini said another negative was the mining tax and carbon tax, which had both dampened offshore interest.
Against this backdrop, it is not all that surprising when Mr Mannolini concluded there were relatively few truly landmark transactions in a quiet year.
Law firm Gilbert + Tobin has a similar view on market conditions, finding that global macroeconomic issues dominated by instability in the Euro region created unprecedented levels of uncertainty and volatility in global equity markets.
“Australia has not been immune and given the strong reliance of WA companies on equity markets to fund working capital and growth, the capital raising environment has proved to be very challenging,” the firm said in a statement.
“Companies have had to be nimble and opportunistic in their capital raising pursuits. Small windows of opportunity to raise capital have in most cases been followed by prolonged periods of poor equity capital market conditions and investor sentiment.”
KPMG director James Turnbull agreed that, notwithstanding the relatively strong performance of the local economy, negative global sentiment has resulted in heightened risk aversion, from both from the banking sector and boards, reflecting a world of reduced capital availability and increased cost of funds.
“With the lessons from 2008-09 still fresh in the memory of corporate Australia, many businesses are choosing to maintain highly defensive balance sheets in order to ameliorate any potential damage in the event of a GFC Mark 2,” Mr Turnbull said.
He added that poor market sentiment resulted in a very tight IPO market and secondary raisings were also lower following the repair of balance sheets in 2009.
“The Western Australian IPO market was almost exclusively reserved for small exploration floats; i.e. WA’s version of venture capital, as investors have little appetite for the slower lane of the two-speed economy,” Mr Turnbull said.
“Even quality growth companies servicing the mining sector were required to offer stock at keenly priced levels to ensure market support.”
Mr Turnbull said the withdrawal of the Barminco float was symptomatic of the IPO market in 2011.
While the Barminco IPO was the highest-profile casualty of the weak market, it was by no means alone.
Other companies to suffer included Mineral Commodities, which announced ambitious plans to acquire $140 million worth of mineral sands assets in the South West.
It appointed Morgan Stanley as lead manager and Mirabaud Securities as co-manager of the required capital raising, but they were unable to complete the funding.
Another less dramatic example was Draig Resources (formerly C@), which had to slash the price of a $17 million capital raising so that it could complete the purchase of coal tenements in Mongolia.
South Boulder Minerals is another company that has been required to cut the price of a capital raising in order to secure the funds.
Mr Turnbull believes there will be more focus on alternative sources of capital.
“Due to the current dislocation between financial market sentiment and the strength of Western Australia’s economy, an increasing number of private businesses are seeking capital through alternative means (than banks or public markets) from providers who are able to take a longer term view,” he said.
“A key theme that continued this year was investment from international strategic investors acquiring or funding local players who otherwise don’t have the capital to fund the significant growth opportunities within their reach.
“Such deals provide an international player with a beachhead and smaller local companies with balance sheet confidence to pursue (at times risky) growth.
“This is particularly noticeable in the oil and gas services industry where established players in the declining North Sea market are looking to Perth as the ‘next Aberdeen’ and funding the smaller independent players in WA.”
Mergers & Acquisitions (WA) director Jeff Roberts said the European debt problems and associated share market volatility affected the volume of transactions his firm was able to complete.
However, he has noticed signs of a significant uptick in activity levels.
“Most notably we have strong interest from some overseas companies that are keen to make acquisitions in Australia, and we do anticipate completing a couple of deals in 2012 with these buyers,” Mr Roberts said.
“Many businesses in WA exposed to the resources sector are growing strongly and these are the types of business we find in very strong demand, not only from international buyers, but also from local listed companies and private equity firms as well.”
