Curmi & Partners

Local IPO activity amid rising interest rates

By Beppe Jaccarini

2022 has seen companies battling high inflation, staff retention and a rising cost of borrowing, and as a result, many local companies have been preoccupied with sustaining the viability of their business model. While it is essential that a company’s financial health is revisited regularly in such economic conditions, a select few businesses have been able to identify opportunity amid this uncertainty. Establishing financial stability during these testing times can serve as a solid foundation for growth and in gaining a competitive advantage. Although funding may often seem to be the stumbling block, the local equity market is showing resilient signs to a strong business plan and capital raising strategy.

The latest threat to the global economic climate has been inflation, which has surged substantially since the turn of the year. The US Federal Reserve (“Fed”), European Central Bank (“ECB”) and Bank of England (“BoE”) are crucial policy-making institutions which use interest rates as their tool to ensure inflation returns to sustainable levels. The Fed issued its third consecutive 0.75% rate hike this September and its fifth hike of the year, taking the federal funds rate to levels last seen in early 2008. Similarly, the ECB moved interest rates upwards by an unprecedented 75 basis points, while the BoE also accelerated interest rate hiking in 2022 raising the base rate by 200 basis points since the start of the year. Analysts forecast interest rate hiking to continue as far as 2024 until which inflation levels are expected to revert down to normalized levels of around 2%.

Markets are highly reactive to both inflation and interest rates. As was evident in recent years, businesses seek to take advantage of cheap funding when interest rates are low via the issuance of corporate bonds. In parallel, equities appear attractive to investors during a low interest rate environment as appetite turns towards higher risk-return assets when bond yields are low. As interest rates are hiked upwards however, investor sentiment declines as equity investors recognize the impact this has on company valuations. In fact, year-to-date 2022 there has been a 57% drop-off in global IPO proceeds from the same period in 2021 as prospective issuers are seen adopting a wait-and-see approach. In essence, the negative relationship between interest rates and equity valuations stems from lower profits due to higher borrowing costs, less disposable income for consumers bearing higher mortgage rates, a slowdown in economic growth as demand for loans decreases, and the rising appeal of bonds as yields increase.

On the local side, equities continue to show promise with little signs of slowing despite the overriding economic weakness. IPOs are on the rise with a more diverse range of sectors coming to the market. IPO volumes in 2022 currently stand at €89 million, already surpassing 2021 levels of €84 million. This relatively strong performance demonstrates the resilience of the local market and its insensitivity to adversity, suggesting that weakening signs of foreign IPO activity do not necessarily translate locally. Lending support to this view is the overwhelming interest the Maltese public showed APS Bank plc earlier this year as the offer period was ended just hours after opening, in which €66 million in funds were raised from a total subscribed interest of over €100 million to support the bank’s journey.

There are multiple roads a private business may choose to take when raising capital, and despite the concerns surrounding the current state of the economy, market openings persist for those companies which are prudent and informed about their approach to go public. Often the greatest cost a business can endure is the opportunity cost that arises from unnecessarily high levels of caution. As the world economy is faced with new headwinds, room for growth opens for those companies brave enough to create their own weather.