What explains the recent surge in rights issues in France?

Questions to Alexis Bauza, Executive Director, Strategic Equity Capital Markets at Natixis Corporate & Investment Banking

Air France-KLM, EDF, Faurecia, Foncière Inéa… French corporates have raised €6 billion in equity from their existing shareholders year-to-date through rights issue transactions, far surpassing the €3.5 billion for the same period last year. This seems surprising given the current capital market volatility. Is it an anomaly or is the uptick in activity likely to persist? Alexis Bauza, Executive Director, Strategic Equity Capital Markets at Natixis Corporate & Investment Banking, gives us his take.

With more than €6bn already at the mid-year point, is 2022 set to be a record year for rights issues in France?

French corporates have already staged six rights issues year-to-date and raised more than €6bn vs. ten deals worth €3.5bn in the same period of 2021. It is worth mentioning that two deals alone account for most of this amount, while some issues were already broadly expected by the market as they were announced several months ago – even as early as 2021. However, these deals were only launched very recently when a window of opportunity opened on the market.

For example, car parts manufacturer Faurecia’s decision to launch a rights issue to finance the acquisition of Germany company Hella was announced in August 2021, but we faced severe headwinds and were unable to launch this deal earlier. A window of opportunity opened just after the Faurecia shareholder meeting, so we decided to launch the transaction to de-risk the company as it prepared its refinancing for the Hella acquisition. Meanwhile for Air France-KLM, this second stage in the group’s recapitalization strategy had been on the cards since April 2021 and management reiterated its intention when it reported full-year earnings in mid-February. EDF’s issue was finalized in April but had been in the offing since mid-February.

Looking to the second part of the year, Société Générale’s specialist vehicle leasing subsidiary ALD Automotive is soon set to launch a €1.3bn rights issue to finance the acquisition of LeasePlan announced in January.

So 2022 looks set to be an excellent year for rights issues: we should even revisit the stellar performances of 2017 (€8.4bn).

We have seen renewed volatility on the markets since the central banks’ announcements, does this change the outlook for ECM deals?

Today’s market is all about finding windows of opportunity, so we constantly need to be poised ready to take advantage of the right opening. We witnessed a peak in volatility in early March after war broke out in Ukraine, as the V2X index hit 50. Both the Air France-KLM rights issue in late May and the Faurecia deal in early June were launched during a phase of low volatility, with the V2X volatility index at around 23 to 28, offering the right circumstances for a rights issue. The ECB meeting on June 9th and the Fed meeting on June 15th were expected to fuel volatility and we factored these projections into our deals as we ascertained their various characteristics. We have to learn to live with these phases of severe volatility, so we always advise our clients to be at the ready and poised to seize any windows of opportunity.

We organize talks with shareholders on the disposal of listed holdings in blocks, and with corporates for the issue of convertible bonds: these deals can be executed in a short timeframe, which means relatively limited market exposure.

These deals enjoyed massive support from both the French government and existing shareholders – does that not make their success somewhat artificial?

It is definitely not artificial, as the market played a key role and made a major contribution to these deals. For the two biggest issues – EDF and Air France-KLM – the French government admittedly did take part, but its role was restricted to merely participating in the transactions.

Indeed for Air France-KLM, the issue was supported by a new shareholder, CMA CGM, which decided to invest up to €400m to hold up to 9% of ex-post share capital, alongside the signature of a partnership in the air cargo business. This move was a clear signal for the market regarding Air France-KLM’s long-term potential after the group stepped up its transformation over the past two years with very convincing results these past two quarters.

The latest deal was Faurecia’s rights issue, which attracted an overall subscription rate of 187%: the transaction was worth €705m, so demand came to almost €1.3bn. This resounding success provided a very strong showing of shareholders’ and investors’ confidence in the outlook for the new structure, which has recently been rebranded Forvia.

For this kind of substantial deal, it is crucial to give priority to existing shareholders by allocating preferential subscription rights, which can either be exercised to buy new shares at a discount or sold on the market. This kind of transaction structure is compatible with today’s market volatility.

Strong tailwinds for Air France-KLM

Franco-Dutch airline Air France-KLM has just successfully completed a €2.256 billion rights issue with preferential subscription rights maintained for existing shareholders. Natixis Corporate & Investment Banking is one of Air France-KLM’s core banks and was joint global coordinator for the transaction. Proceeds from the deal will be allocated to repaying a large portion of French state aid received in 2021, while the success of this issue demonstrates the group’s achievement in navigating the recent crisis: it reported much higher first-quarter earnings than expected by the market and is anticipating a successful summer season.

Like many companies in the sector, Air France-KLM received substantial State support during the Covid-19 crisis to help it face plummeting results due to the nose-dive for air traffic. However, this state aid is temporary and comes with a number of conditions imposed by the European Commission such as giving up certain slots at Paris airports to other airlines, and a ban on M&A or taking a minority stake of more than 10% at a competitor. The group therefore needed to repay this state funding to recover its strategic leeway.

Air France-KLM is now free from nearly all these restrictions after its rights issue, putting it in a strong position to meet its financial leverage target for 2023 by bolstering its equity and cutting back net debt.

“This deal was initiated after positive newsflow on the group, and we received a great deal of interest from investors keen to get involved in this planned transaction” states Alexis Bauza at Natixis CIB, which supported its client right throughout this bumpy period and helped the group emerge stronger after the crisis. “This deal was an opportunity for Air France-KLM to welcome a new long-term partner to its shareholder structure. CMA-CGM is now the group’s third largest shareholder with a 9% stake, thereby reflecting its confidence in the company’s outlook.”

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