Choppy seas ahead for the Medibank float

Volatility in the market may have increased, but analysts say there is still an appetite among investors for new listings.

The federal government and the investment bankers advising on its Medibank float, will be hoping with all their hearts that the ructions in equity markets overnight, and over the past week, do not turn into a rout.

Finance Minister Mathias Cormann this morning pushed ahead with the government’s $4 billion-plus privatisation, announcing plans to lodge the prospectus with ASIC on Monday, within an hour or two of a Wall Street slide and the VIX gauge of volatility hitting its highest level since late 2011.

The DJIA slumped more than 450 points at one stage in a wild session, as institutions and hedge funds, spooked by fears of a global economic slowdown and a sell-off in Europe, dumped blue-chip stocks. The S&P 500 index is down 9 per cent from its September high.

While this is probably not the catastrophic market event that Reserve Bank Assistant Governor Guy Debelle was warning us about just two days ago, it has all the hallmarks of an increase in risk aversion and shift in investor appetite that could hurt the booming IPO market. And Medibank is the biggest ticket on that list of IPO hopefuls.

Debelle’s argument was that a violent sell-off in debt markets would be amplified by the fact that current derivatives exposures are at far higher levels than they were before the GFC, and far lower liquidity levels than most investors assume. That means, when there is a rush for the exits, not everyone makes it out.

So far, equity markets have borne the brunt of the sell-off, while safe-haven US Treasuries benefited from a flight to safety and the 10-year yield actually dipped below 2 per cent to a scant 1.84 per cent.

An increase in volatility hurts confidence and makes it harder to price new equity listings. While the Australian market’s near 10 per cent correction over recent weeks has made valuations more appealing, listing prices may need to be trimmed further to attract more fearful investors.

Alternatively, the window for new floats might just slam shut, as abruptly as it did after the poor Myer float in 2009. Back then, only a handful of companies made it onto the ASX boards before investor patience for new listings evaporated.

The latest IPO boom has been far longer and more robust. In the third quarter alone, 20 IPOs were launched on the ASX, raising US$3.3bn, according to data from EY.

That was half the number of listings for the year to date, with 44 IPOs raising US$8.5bn across the first nine months of the year. The volume has already matched that of 2013 and the proceeds raised have exceeded the $5.4bn raised last year.

The figures reveal the pent-up demand from companies to raise capital via IPOs and from private equity firms to exit, after the IPO market sat moribund from 2007 till last year. Australia’s largest buyout firm, Pacific Equity Partners, listed three companies this year including Veda and Spotless at around $1bn each, while mid-tier firm Quadrant sold four.

EY transaction support leader Gary Nicholson says that although market volatility has increased, the decline has been orderly and both institutional and retail demand for new shares remains strong.

“It hasn’t moved down so far or with such a shock that appetite has been dimmed,” Nicholson said, adding that the firm was expecting a “rather frantic” lead-up to Christmas with a large pipeline of companies planning to list. 

Investment bankers also point to the willingness of private equity sellers to meet the market by adopting realistic pricing and retaining material stakes in the companies they sell. That didn’t happen with Myer, which has never traded above its listing price.

Cormann said pre-registrations for the Medibank offer exceeded expectations, with around 750,000 people lodging interest, and he brought forward the listing date from early December. ASIC will take five days to review the prospectus before the offer opens to retail investors.

The trouble for the federal government is that once the button has been pressed on a massive privatisation, it is very hard to slow down the process and almost unthinkable to abandon it, regardless of what is going on in markets. Medibank shares will be priced just a few days ahead of listing.

That will make for a nail-biting few weeks before Medibank hits the boards in late November. 

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