The sudden and sharp sell-off in equity markets in mid October hit the flotation plans of UK challenger banks particularly hard. Virgin Money chief executive Jayne-Anne Gadhia tried to put a positive spin on the delay to its offering that had hoped to raise £150 million last month, saying: “Virgin Money continues to perform strongly and we remain focused on delivering a successful initial public offering as soon as market conditions allow.” Gadhia offered no guesses, however, as to when that might be.
Aldermore, having set a wide initial price range of 217p to 265p for its £300 million deal, pulled the transaction as markets panicked in the two days before pricing. Prospective investors might have looked askance at an IPO from a growth company from which only £75 million of the proceeds would be ploughed back into growing the business. The majority of funds raised would have allowed Aldermore’s private equity backers, led by AnaCap, to cash out.
Again, Aldermore offered no guidance as to when the flotation might be revived. That £75 million had been earmarked to finance growth until this could become self-funding after 2016. Now, AnaCap and other private equity funds must stump up more money to support the next phase of Aldermore’s development.
The sell-off was sharp, but of a kind that markets have experienced frequently in the past five years. From its recent high of 3669 in early September, the FTSE All share index was down 11% at the worst point on October 16. And it was not just in the UK.
Stuart Kirk and Rineesh Bansal, analysts at Deutsche Bank, ask: “What happened? Investors were supposedly in love with US banks. Shares had doubled in two years and there was optimism that a firmer US economy would lead to rate rises and higher net interest margins. A few days of turmoil has dashed these hopes for a NIM recovery – shares in JPMorgan for example are down a 10th in 10 days.”
What happened, according to equity capital markets bankers, was a shift in investor sentiment even more pronounced than the extent of the fall in stock prices. “That shift in sentiment is measured in outflows from equity funds, which turned negative back in September,” says one London-based ECM banker. “Funds that had had money coming in all year that they needed to put to work suddenly had to draw liquidity to meet redemptions. And volatility doubled.” Bankers say that investors struggled to value Aldermore, a fast-growth newcomer in a sector used to price-to-book valuations. Many declined to put in orders during rising volatility and those that did put in much smaller ones than had become usual in the strong two-year run of IPOs since late 2012.
High heels
The UK IPO market was not closed shut. Jimmy Choo, maker of flashy stiletto shoes, might have had to price its offering at the bottom of the indicated price range, but still managed to raise £141 million. But 10 European IPOs were pulled in October, with Clayton, Dubilier & Rice cancelling the £200 million flotation of car auction site BCA Marketplace the week after Aldermore pulled its deal.
When might delayed IPOs return? “IPOs are a lot about accounting,” says one banker. “Having been based on most recent numbers, the next chance might be six months to one year from now.”
Policymakers, for some reason shocked by the market sell-off in October, suddenly sounded accommodating again, reviving expectations that rates will stay lower for longer. The notion has somehow taken hold that a lot of banks will see earnings rise along with rates on the asset sides and that this delay in the rate cycle is bad news for banks.
That’s highly doubtful. Many banks now benefit from negative funding margins. When rates rise, let’s see what happens to NPL levels on consumer loan books in countries with high debt levels – such as the UK.
