After an abrupt halt during the first 2020 lockdown, corporate activity levels surged back and remain surprisingly strong. Despite genuine risk factors, there is no sign of a slowdown.

2020 started with reasonable levels of activity, but down from previous years as pricing got lofty and capital market participants started to think the market was at its peak.

The first lockdown and initial signs of the pandemic resulted in mass selloffs in global capital markets and discussion of a recession of a nature not seen since the 1930s.

Mergers and acquisitions (M&A) negotiations were almost unanimously terminated and businesses focussed on recession-proofing, improving balance sheets and accessing standby sources of credit.

While the M&A market was dead, there was a wave of public and private capital markets transactions including notable secondary capital raises from Auckland Airport ($1.2 billion), Kathmandu ($207 million), Z Energy ($350m) and Sky Television ($157m). These were facilitated by NZX's and the Takeovers Panel's incredibly fast introduction of Covid relief measures, relaxing some normal restrictions and allowing flexibility in capital raising structures.

Swift Government intervention (which will see core Crown debt as a percentage of GDP almost double to 48 per cent in 2023) supported business as usual trading. Key initiatives included the Wage Subsidy Scheme, Debt Hibernation Scheme, quantitative easing and the postponing of new rules requiring New Zealand banks to hold more regulatory capital. Important safe harbours were introduced for insolvency-related directors' duties which provided relief for liquidity issues connected with Covid.

M&A's quick recovery

These changes and similar actions in overseas economies quickly stemmed concerns of a hard landing with enduring effect and after the initial hiatus, M&A activity quickly accelerated to pre-pandemic levels and beyond.

The recent EY New Zealand Private Capital Monitor shows deal volumes for private equity at record highs. Landmark deals in 2020 and early 2021 included sales of Ultrafast Fibre ($854m), UDC ($762m), Go Bus (pricing confidential), BNZ Life ($290m), Metlifecare ($1.3b), Mataura Valley Milk ($268m), TILT ($3.07b) and the IPO of My Food Bag ($342m).

Fuelling the demand were record low interest rates, accelerating housing prices (flowing from reduced borrowing costs and overseas returnees), and increased investment in funds and the stock market as investors seek out investments with a reasonable yield. Unlike the GFC, the underlying fundamentals and banking system integrity were not undermined and investors remain keen to invest.

Last year we surveyed offshore investors concerning their direct investment plans. While most told us that the impacts of Covid would delay (48 per cent ) or suspend (23 per cent) investment in New Zealand, several investors indicated that they saw increased opportunity due to the speed at which NZ controlled the spread of Covid and saw it leading to a "first mover advantage".

Overall, 60 per cent of respondents said they were considering investment in NZ in the next two years, citing our strong fundamentals, relative market stability, and good targets as key factors for future investment. This confidence has certainly borne out.

How Covid redefined markets

The Covid crisis created a catalyst for general reflection, future-proofing and transformation. It accelerated trends in the way we work, the associated technologies and redefined the markets we trade in.

Self-evidently, the pandemic has affected industries in different ways. There have been obvious problems in the aviation, transport and tourism and hospitality sectors but industries such as IT, general retail and health/biosciences have been buoyant. Good examples include My Food Bag and Fisher & Paykel Healthcare.

Increased M&A volume flowing from future-proofing and transformation built on deals initiated in response to environmental, social and corporate governance (ESG) considerations. Examples include the sale of BNZ's life book, AMP Life, and Westpac's wealth advisory business (no doubt products of the Australian Royal Commission into the banking, superannuation and financial services industries), and the sale of wind-farm business TILT which attracted significant competition as energy participants refocus on green energy.

Insolvencies on the horizon

Jitters will remain. The possibility of further Covid outbreaks creates substantial uncertainty and the risk remains of substantial volatility. The Government flagged in its 2021 budget that it has a $5b Covid buffer available to address this risk.

For now, insolvencies have been staved off. Despite many businesses being on Covid (or other forms of) life support, the IRD and banks have been extremely hesitant to initiate insolvency proceedings and in many respects, it has been easier for failing businesses to survive.

However, the existing government lifeline and bank reticence will come to an end and we anticipate a wave of insolvencies starting towards the back end of this year. A key driver for this will be pressure on the banks to realise or release accounting provisions generated to reflect as yet unrealised losses. We anticipate once the insolvencies start, the floodgates will open. However, there doesn't appear to be any prospect of a general recession and insolvencies are likely to remain relatively sector-specific.

Looking ahead

In summary, sentiment and investor demand remains strong, with particular optimism around core sectors which are expected to be beneficiaries of current economic and social factors. The outlook for IPOs looks positive as a result of demand flowing from retail investors moving savings away from low-yielding bank deposits. However, volatility across the board is expected and, to a degree, the private and public capital markets are "on edge". It seems like the market is running on adrenalin.

Foreign Investment Controls

Not all Government changes were facilitative. Following the overseas lead, New Zealand introduced an emergency measures regime for foreign investment meaning that effectively all M&A activity required screening against a national interest test.The previous $100m threshold was dropped to zero with the focus of the legislation being to ensure that our weakened assets were not acquired at a bargain price by overseas investors.

A key question is whether these measures served their purpose of protecting national assets and whether they choked off much need capital as some feared? The consensus is that despite frustrations associated with the delay and the cost and uncertainly associated with national interest test thresholds being interpreted too conservatively, the measures did not disrupt the introduction of foreign capital.

We are not aware of any deals being rejected on the grounds stated in the emergency measures provisions. It is important not to assume this means that the measures were a waste of time. Experience suggests the mere existence of the regime deflects deals which would fail to meet the relevant criteria.The regime is subject to a 90-day review and we expect it to be dropped in the near term. The similar Australian regime has been dropped.

This article was originally published in the NZ Herald Capital Markets report on 28 May 2021. Click here to read our report, Expanding Horizons 2020 which looks into offshore perspectives on investment into New Zealand during the Covid-19 recovery. 



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