Unstable markets drag Canadian M&A, debt issuance to four-year low

TORONTO  -Canadian dealmakers are optimistic about a return to strength in the second half of the year after mergers and acquisitions in the first quarter dropped to pandemic levels, belayed by higher borrowing costs and panic around a banking crisis.

The collapse of regional banks Silicon Valley Bank and Signature Bank in the U.S. tightened credit markets, making funding difficult for deals.

As the banking crisis abates and many global central banks move to the sidelines to assess the impact of rapid interest rates hikes, bankers are, however, betting that appetite for dealmaking will return.

“We expect the second half of the year really to be where stability hopefully comes back or some kind of certainty with respect to path forward and for M&A to return,” said Sean Rowe, national deals markets and value creation leader at PwC Canada.

Canadian M&A volumes totaled $34.7 billion in the first quarter, down 52.3 percent from a year ago, with dealmaking off to the worst start since the same period in 2020.

Global M&A volumes during the first quarter slumped 48% to $575.1 billion as of March 30, compared with $1.1 trillion during the same period last year, according to data from Dealogic.

After eight successive interest rate hikes, the Bank of Canada paused raising rates, while the U.S. Federal Reserve raised interest rates minimally, by a quarter of a percentage point, in March and indicated it was on the verge of pausing further rate hikes.

Sarfraz Visram, head of Canadian and international mergers and acquisitions at the Bank of Montreal, said having some certainty around where interest rates would settle helps dealmaking. He added that sellers need to reset their expectation on valuation – something that has not happened just yet.

“Price expectations are, I’d say, 50-70 percent higher than where I think they should be.”

Some market participants noted the second quarter is already off to a stronger start, with the mining sector gathering momentum.

Copper miner Teck Resources rejected Glencore Plc’s $22.5 billion offer on Monday. That overture came after Lundin Mining Corp bought a 51% stake in Chile’s Caserones for $950 million last month.

Of the deals announced in the first quarter, RBC Capital Markets, Bank of America Corp’s BofA Securities Inc and JP Morgan took the top three spots in the advisory rankings.

Energy-focused deals led Canadian activity in the first quarter, including Alimentation Couche-Tard’s $3.3 billion bid for European gas stations from TotalEnergies.

Corporate debt in Canada also fell 8.9 percent in the first quarter, hitting C$17.1 billion ($12.7 billion) from a year ago, the lowest first quarter since 2020.

Abeed Ramji, head of Canadian Debt Capital Markets at TD, said the lack of issuance from banks impacted the corporate debt market, adding that global markets had become more expensive for financing.

($1 = 1.3462 Canadian dollars)

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