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

Canadian dealmakers are optimistic about a return to strength in the second half of the year after mergers and acquisitions (M&A) 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 US tightened credit market making funding difficult for deals.

As the banking crisis abate 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 deal making would 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 comes back and what that we expect 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% from a year ago, with deal making off to the worst start since the same period in 2020.

After eight successive interest rate hikes, the Bank of Canada paused raising rates, while the US Federal Reserve raised interest rates minimally by a quarter of a percentage point in March and said 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 deal making. He however added sellers need to reset their expectation on valuation - something that has not happened just yet.

"Price expectations are I'd say 50-70% 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 (TECKb.TO) rejected Glencore Plc's (GLEN.L) $22.5 billion offer on Monday. That overture came after Lundin Mining Corp (LUN.TO) 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.

Corporate debt in Canada also fell 8.9% 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)