Equity capital market issuance has surged in the second quarter of 2020 versus the prior three months as global volumes hit a year-to-date high in May and continued to grow in June, S&P Global Market Intelligence data shows.

The aggregate amount of ECM offerings, excluding convertibles and private placements, totaled $75.32 billion in May, more than three times higher than April's $23.80 billion. As of June 24, aggregate global offerings reached $58.67 billion for the month, already more than double April's total.

This 2020 second-quarter resurgence is good news for global investment banks, which are likely to see similar dynamics to 2019. ECM revenues jumped 65% in the second quarter of the year from a weak first three months, data from research company Coalition shows.

All-time high in US

At $49.65 billion, excluding convertibles and private placements, U.S. ECM issuance in May accounted for nearly two-thirds of the global total, according to S&P Global Market Intelligence data. Including all transactions, U.S. proceeds were $72 billion, according to William Blair, a global investment banking and wealth management company.

This was a U.S. record, Steve Maletzky, head of equity capital markets at William Blair, said in an interview. Unlike in a typical month when one or two mega deals can skew the stats, a total of 15 transactions raised $1 billion apiece in May. In other words, there was a $1 billion offering on the market every two days in the month, he said.

Many smaller deals were completed during the month, but there were also some large transactions. U.S. companies accounted for two of the top three year-to-date issues, both of which were completed in May. These were a $13.28 billion follow-on common stock offering by asset manager BlackRock Inc. and a $6.7 billion follow-on by Regeneron Pharmaceuticals Inc., S&P Global Market Intelligence data shows.

The U.S. also topped the list for year-to-date equity capital market issuance, with more than three times the number of offerings and the aggregate amount raised than second-ranked China.

ECM activity drivers

The May and June rebound was bittersweet. It reflected improved investor confidence in a potential recovery from the COVID-19 pandemic but was also driven by companies being forced to tap the markets to avoid liquidity shortages.

Following government lockdowns earlier in the year, many companies in the sectors hardest-hit by the pandemic were either on the verge or already in breach of their debt covenants, so they turned to the equity capital markets, Alex Morozov, director of European equity research at global independent investment research company Morningstar, said in an interview. Some "simply had nowhere else to go", he said.

U.S.-based cruise operators Norwegian and Carnival, and Swiss travel retailer Dufry AG, resorted to equity raising "even at fairly depressed prices" due to acute liquidity needs, Morozov said. Carnival said June 18 that it had to start selling ships years ahead of schedule as it posted a second-quarter loss of $2.38 billion.

Easing lockdowns had a positive effect on ECM activity, but the main trigger for the May surge was the "massive amount of stimulus" injected into the U.S. and global financial systems. This has given investors confidence that markets will remain "orderly and actively supported by government balance sheets," Maletzky said. Investors started looking beyond 2020 and pricing companies based on their expected financial performance in 2021 and 2022, he said.

Companies hardest hit by the virus, in sectors such as travel, consumer, leisure and entertainment, had to recapitalize their balance sheets in the second quarter but were not alone in tapping the market, he said. Those in healthcare and technology, the two greatest beneficiaries of the pandemic, sought equity financing for strategic or opportunistic reasons, he said. Given the economic uncertainty, they wanted to capitalize on strong investor demand now, and position themselves as consolidators or buyers in the markets if financing or economic activity tail off in the future, he said.

Future disruption

Many companies see a window of opportunity in the current favorable equity market environment and are accelerating their issuance plans, aiming to push for July and August IPOs and follow-ons that were planned for later in the year, Maletzky said.

This "here-and-now" mindset stems from a desire to avoid taking on more time risk and uncertainty as the situation remains volatile. Four factors could disrupt market activity in the future, including the U.S. Presidential Election in November and a potential second wave of the virus following the reopenings across the U.S. and elsewhere in the world, Maletzky said.

There is also monetary-policy-related risk in the U.S. if the financial system stimulus turns out to be too much, too fast and there is a meaningful devaluation of the dollar, he said. Oversupply of new issuance is a final risk. For every new offering, there is less capital available for the next deal, so many companies prefer to be among the first rather than the last in the market, he said.