After a Dismal 2012, Is the IPO Market Poised for a Comeback?

Some underwriters say signs are good, but others argue that the Tel Aviv Stock Exchange is still undervaluing companies.

Last year was another tough one for Israeli underwriters: The stock market didn't feature even one initial public offering the entire year. Capital raised in follow-on bond and stock issues plunged 28% and 35%, respectively, and was mainly restricted to large companies with high credit ratings.

"The first three quarters were very weak, as opposed to the last quarter when the primary market really opened up as well for smaller companies that ultimately constitute the backbone of a healthy market," said Ofer Grinbaum, CEO of Leumi Partners Underwriters. "Overall it is obvious that low interest rates over time have a tremendous effect, so the market is finally starting to function again."

The poor state of the IPO market contrasts with the secondary market, which saw something of a recovery in 2012. The TA-25 index rose more than 9% and the leading sectors boasted double-digit returns - the TA-Banking index rose 123%, the TA-Technology index by 18% and the Real Estate-15 index by 15%.

The bond market also made a comeback in 2012. Daily turnover rose 10% in 2011, to an average of NIS 4.1 billion. The annual return on the general bond index in 2012 reached 8%, compared to just 3% in 2011. The volume of corporate bond trading rose 13%, to a record daily average of NIS 1 billion.

A report on the 2012 IPO market prepared by Rosario Capital shows that the year started out with a flurry of NIS 9.5 billion of capital raised in the first quarter, but tailed off drastically to a low of just NIS 2.3 billion in the third quarter. The market recovered in the final quarter, with companies managing to raise NIS 5.6 billion within a two-month period.

All in all, companies listed on the Tel Aviv Stock Exchange raised NIS 31.6 billion in 2012 through public issues or in private placements of bonds and through stock offerings. That was 15.5% less than the NIS 37.4 billion raised in 2011. None of this includes the largely state-guaranteed NIS 7.9 billion of bonds placed by Israel Electric Corporation.

As in past years, bonds accounted for the bulk of funds raised - about NIS 30 billion, including private placements to institutional investors, a 10% drop from 2011 and 25% short of the NIS 40 billion raised in 2010.

Real estate leads

The real estate sector was again the leading borrower from non-bank sources, raising NIS 10.4 billion, a 48% jump from 2011, due mostly to the difficulties the sector faced obtaining bank financing. The banks themselves followed closely with borrowings of NIS 9.6 billion on the market.

A notable trend in recent years has been a tendency to raise capital by expanding existing bond series, largely to circumvent Hodek Committee guidelines, which don't apply to existing bonds. The guidelines, which set more stringent conditions for issuing corporate debt, took effect in 2011.

Rosario Capital points out, however, that for the first time during the fourth quarter, companies began to issue new series of bonds on a large scale.

One interesting development in 2012 was a sharp rise in direct private corporate placements of tradable bonds with institutional investors to NIS 7 billion, 260% more than in 2011. Behind the steep increase was the negative sentiment permeating the market, which made it difficult to execute public offerings and pushed bond yields up.

Equity capital raised in 2012 totaled a mere NIS 1.9 billion, including 34 rights issues for a total of NIS 1.5 billion and 20 stock issues, which accounted for the balance.

The TASE didn't host even one IPO in 2012 and follow-on offerings became increasingly rare as the year wore on. The one exceptional share offering was by the IDB group in the first quarter, for NIS 321 million. Meanwhile, a large part of the rights offerings - about NIS 700 million in scope - was by companies in the Jerusalem Oil Exploration Ltd. (JOEL ) group.

Rosario Capital CEO Noga Knaz is more optimistic about the coming year. "Based on the prevailing market outlook, 2013 will be the year of the stock," she says. "If so, we can expect a comeback for the IPO market. We can already see the first signs of this."

Grinbaum, however, doesn't expect the IPO slump to let up this year, because the fundamental market environment that deterred IPOs over the past four years - namely the fact that controlling shareholders view their companies as undervalued by the market - hasn't changed.

Aside from offerings by Azrieli Group, Carasso Motors, the Victory Supermarket Chain and perhaps a few other companies, there haven't been any significant IPOs in recent years, he noted.

"The [IPO] market over the past few years has been weak mainly because of pricing disparities between controlling shareholders and the market," said Grinbaum. "In any case, experience shows that in some of the IPOs that did go on the market, the companies' share price didn't gain. Moreover, large export-oriented companies with expanding operations trade at better price-earnings ratios abroad, so our market is more attractive for companies that operate more locally."

Clal Finance Underwriting, headed by Tal Rubinstein, topped the market in offerings, with about NIS 7.5 billion raised in 28 issues that it led, not counting NIS 4.4 billion by IEC. Poalim IBI Underwriting led 17 offerings that took in NIS 4.5 billion, while Leumi Partners led 12 for a total of NIS 4.9 billion. Leader Underwriters managed eight offerings amounting to NIS 3.1 billion, and Rosario led four that raised a total of NIS 2 billion.

Haaretz
Haaretz
David Bachar