Providing capital and confidence: the vital role of London’s markets during the COVID pandemic
It has been an unprecedented six months.
Flexibility, speed and resilience were the hallmarks of London’s initial response during the testing period of February and March, with extreme levels of volatility and record numbers of trades.
London’s markets remained open and robust in the face of these extreme conditions. But at the time, there were questions about how the capital markets would respond to this traumatic shock for the global economy. Over this period, these questions have been answered and vital confidence provided.
London’s experience and capabilities as a mature, adaptable and innovative international finance centre have come to the fore, providing support to growth companies and multinational corporates as they seek to strengthen their balance sheets and liquidity positions, and to sovereign nations and multilateral agencies, as they respond to the economic and social impacts of COVID-19.
Vitally, the second quarter of 2020 has been notable for the robust participation by issuers and investors. Long-term capital has been delivered with efficiency and speed. This is reflected in the remarkable range of fundraisings: from follow-on equity issues that have raised between £5m and £2bnto social bonds to tackle COVID-19; and the GDR listing of China Pacific Insurance (Group) utilising Shanghai London Stock Connect.
A key feature that has underpinned London’s entire ecosystem of advisers, issuers, investors and regulatory authorities during this time has been its adaptability. It has adapted to the new dynamics of working from home. It has embraced digitalisation. It has implemented temporary measures that have ensured markets continue to function efficiently. During this period, it has adapted to the transformation of the single biggest benchmark in the world - the migration from LIBOR to SONIA - and seen milestone issuances.
London has shown itself to be a market that knows how to operate, even in such a changed environment. Its unique liquidity features have been optimal for issuers and investors in these fast-moving times. And, as the ecosystem has rapidly adapted, so capital has been readily available.
In the first half of 2020, £23.7bn has been raised in London through IPOs and follow-ons. Seven of the top 20 largest European transactions since 1 March have been executed on London Stock Exchange, with deals in London accounting for 43% of total capital raised across Europe during this period.
London stands out as Europe’s capital of recapitalisation. Since 1 March, 249 follow-ons have raised a combined £17.4bn. They ranged from £5m to £2bn, highlighting the sheer range and scale of capital that could be raised in a very short time.
Listed companies were also granted temporary flexibilities by the regulatory authorities in March, while retaining an appropriate degree of investor protection. A good example of this has been the relaxation of Pre-emption Group Principles, supporting non-pre-emptive issuances by companies of up to 20% of their issued share capital (ISC), rather than the 5% for general corporate purposes with an additional 5% for specified acquisitions/investments. In the first half of 2020, 42 companies on the Main Market utilised the 5% exemption to raise a combined $13.2bn through accelerated bookbuilds for COVID-19 related recapitalisations.
Capital raising has happened quickly – often taking about one week. They have been orderly and have been executed with a level-headed approach to discounts. Since 1 March, the average discount to last close for transactions above £5m has been 5.3%. The accelerated bookbuilds of some companies - such as Asos, SSP and AutoTrader – were raised at a slight premium. The subsequent average price performance of £5m+ transactions since 1 March has been positive - up 8.6%.
One notable feature has been the appetite of retail investors to participate in these fundraisings, which has been facilitated through our partnership with the fintech PrimaryBid. The platform has been deployed in multiple placings over recent months including FTSE 100 constituent Compass Group’s £2bn capital raise, enabling retail investors to access capital raisings on the same terms as institutional investors.
The effects of the pandemic will continue to reverberate. Uncertainties remain. However, companies can focus on their future with the knowledge that the public markets are robust, responsive and able to support them.
As a result, companies can begin to look further ahead. Discussions about IPOs are back on the table. Some of these plans had been put on hold as a result of the volatile market conditions. But not all. Some companies are looking at their business and assessing their capital structures and how they want to take their business forward
Companies that had previously been considering alternative sources of finance in the private markets, involving greater debt levels and time-limited exit strategies, are re-evaluating. The attractions of a permanent capital structure in the public markets has brought some to look at the IPO process.
AIM features in many of these conversations. Unsurprisingly. The most successful growth market in the world, AIM accounted for 68% of all IPO and follow-on capital raised in Europe in the first half of 2020. In total, there were 200 deals, raising £174m through IPOs and £2.8bn in follow-ons. Eight of the top 10 European growth market equity transactions over the first half of the year took place on AIM.
AIM also celebrated its 25th anniversary in June. Since its launch, it has helped over 3,800 companies raise a combined £118 billion, supporting companies throughout changing business and economic cycles. This continued access to capital is particularly important today helping to support business in the recovery from the impact of the COVID-19 pandemic as firms look not only to strengthen their balance sheets but to fund innovation and growth.
There has been a similarly strong response from London’s debt capital markets. In the first half of 2020, 521 bonds were issued, raising $358bn. This represents a three per cent increase in issuance compared to the same period in 2019.
Much of this issuance has come from international issuers, including sovereigns, corporates, financial institutions and supranational bodies. They account for 48% of the amount raised and 59% of the number of bonds issued from the beginning of March.
Strong growth has also come from UK incorporated issuers. The amount raised by these issuers grew by 23% compared to the same four months in 2019 ($112bn in 2019 vs $138bn in 2020) while the number of bonds grew by 19% (113 in 2019, 135 in 2020).
The largest UK corporates to issue bonds included Tesco, BAE, National Grid, BP, GSK, Diageo and SSE, while financial institution issuers included Bank of England, Coventry Building Society, Nationwide Building Society, L&G, Phoenix Group, Barclays, RBS, Lloyds Bank.
The average maturity of the bonds increased as well. The bonds issued during this period in 2019 had an average maturity of nine years; that grew to ten years in 2020. Most of the bonds issued had a maturity in the three to ten-year range with a few 30-year maturity tranches as well, showing an interest in securing funding for both short and long-term activities.
The COVID-19 pandemic has underlined the importance of making the transition to a low-carbon economy. In response, countries around the world are bringing forward green recovery packages. A growing number of corporates are announcing their net zero goals.
Financial markets play a pivotal role in the transition to a greener, more sustainable economy, by enabling the mobilisation and reallocation of capital towards the opportunities presented by this necessary transformation. During this crisis, London’s markets have continued to support this transition.
The Green Economy Mark, which was launched in October 2019, is a world-first, data-driven green classification and Mark for equity issuers. Using FTSE Russell’s Green Revenues Data Model as the underlying framework, it identifies issuers across all segments of the Main Market and AIM with green revenues greater than 50% of their total revenues. On July 16 we announced the 2020 cohort of Green Economy Mark issuers and launched a new report on the sector.
This year 8 new issuers were awarded the Green Economy mark, bringing the total to 86 issuers with a combined market cap of £67.73bn. As a group they represent 8% of total capital raised on London markets over the past 24 months, four times their market cap representation of 2%. Collectively, issuers with the Green Economy Mark have outperformed the FTSE All-Share Index over the past two years by 36%. While the markets experienced significant volatility during the COVID-19 pandemic, Green Economy Mark equities have, in aggregate, demonstrated greater resilience and subsequently recovered faster than the rest of the market.
London’s markets have also continued to lead in the provision of sustainable and social finance.
Social and sustainability bonds can play an important role in directing funding to countries, sectors and people across the world who are being heavily impacted by this pandemic.
London has been supporting multilateral agencies in their efforts to mitigate the impact of COVID-19. African Development Bank’s (AfDB) $3bn Fight Covid-19 social bond, the third largest social bond to date to be issued in the capital markets, was issued on London’s Sustainable Bond Market in April. The International Finance Corporation (IFC) issued its $1bn social bond – its largest ever – to support emerging markets. In June, Corporacion Andina de Fomento (CAF) also issued a €700m Pandemic bond on the London markets.
In April, we announced an admission fee waiver for social or sustainability bonds on Sustainable Bond Market whose proceeds mitigate the impact of COVID-19. This is part of our ongoing contribution to help support these bonds and issuers. This move was widely welcomed by the market and has subsequently been followed by other exchanges.
Global Depositary Receipts
A key reason for the scale of London’s activity during the pandemic is its openness. The whole world is welcome to participate here – at any time. In June, China Pacific Insurance (Group) became the second company to begin trading through Shanghai-London Stock Connect. It is the first listed insurance company on Shanghai, Hong Kong and London. The company raised $2bn through this issue, and at a discount of only 10%.
Convening the value chain
London Stock Exchange is a great convenor. It brings together participants across the entire value chain to conduct their business. That has remained the case even when the environment has been transformed into a distributed one, with the majority of parties working from home.
Our response has been to focus on digital innovation. Our programme of events on digital channels such as Spark Live have supported issuer communications with investors, providing issuers and partners the ability to broadcast their corporate events live and on demand through our Issuer Services platform. We have been determined to keep all members of the ecosystem together, to keep them communicating.
We have digitised our events and leveraged our network to deliver timely content to issuers on range of technical considerations through the current crisis. We have engaged with 22 channel partners the first half of 2020. Our webinars are achieving significant reach, with levels of engagement up to ten times higher in some categories. Spark page views have doubled from pre-COVID levels.
Many of these recently adopted forms of digital investor communications will be here to stay. According to this recent survey by Berenberg, the great majority of investors would be willing to commit capital after meeting management teams and analysts via video conference and many say these ways of communicating are more efficient.
Market statistics tell a clear story. In the first half of 2020, as the world grappled with the COVID-19 pandemic and its impact on the global economy, £23.7bn in equity capital was raised on London Stock Exchange. That represents 7% of global equity capital raised during this period.
But such statistics tell only part of the story. This capital – raised across a whole spectrum of activities and covering many nations and sectors – was raised in a country with a population of 60m people and which accounted for 3% of global GDP in 2019.
London punches above its weight. It is open to the world. In the face of a global pandemic, it is where the world can get its business done.
Dr Robert Barnes
Global Head of Primary Markets and CEO Turquoise
London Stock Exchange Group