2013 Annual US Capital Markets Watch Analysis and trends

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1 Annual US Capital Markets Watch Analysis and trends A publication from PwC s Deals practice January 2014

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3 Contents Foreword Capital Markets Themes in... 3 US Capital Markets Overview... 5 US Equities Markets... 9 US Equities Market Overview...10 The US IPO market The JOBS Act The equity follow-on market The convertible market US Debt Markets US Debt Markets Overview The High-Yield Debt Market The Investment-Grade Debt Market Spin-offs and spin-off IPOs Annual US Capital Markets Watch 1

4 Foreword Welcome to PwC s inaugural US Capital Markets Watch. Reflecting the integrated nature of capital markets, we have broadened the discussion beyond Initial Public Offerings (IPOs) to include the equity follow-on market, the convertible market, debt markets, and spin-offs. Our goal is to provide insights relevant for those businesses undertaking a capital markets transaction in the near future. Our publication analyzes equity and debt capital markets transactions which occurred in in the US. Equity transactions include NYSE or NASDAQ listed companies which undertook IPOs or Follow-on (FO) equity transactions. Debt transactions analyzed include companies that issued Investment Grade (IG) debt and High-yield (HY) debt. US CEOs in our 17th Annual Global CEO Survey are finding reasons to be more confident in many places. At home, the outlook for the US economy is improving. For example, we saw momentum increase in the US deals market over, and business investment is picking up. Internationally, US CEOs are quick to reassess where the opportunities are. These developments are somewhat comforting after some trying conditions over the past few years. Yet uncertainty is still an overarching theme for all CEOs, with tax and regulatory policies among the top concerns. This uncertainty continues to make it difficult for businesses to manage costs, and thus to invest. With global positive economic growth returning, we see a positive environment for US capital markets. This outlook bodes well for companies as customers return to their historical buying patterns, and as both issuers and investors build the confidence to re-enter capital markets. As investors searched for yield in, the capital overhang will continue to drive the search for yield in As capital markets become more crowded, the need for companies to be ready to operate in an increasingly regulated environment continues to become more important from financial reporting readiness, to internal controls, tax planning, and governance matters. Companies that have undertaken an extensive readiness assessment, are often more prepared for the institutional investment community and the financing transaction. Along similar lines, US capital markets have also seen the rise of the independent capital markets advisors to help guide companies through the maze of complexities when looking to raise capital, mirroring the European experience. Henri Leveque Practice Leader Capital Markets and Accounting Advisory Services Neil Dhar Partner Capital Markets Leader 2 Annual US Capital Markets Watch

5 Capital Markets Themes in US Equity Markets Rally to Record Highs The broader stock indices in the US achieved record levels in, erasing losses from the financial crisis and providing strong returns to investors. Both the NYSE and NASDAQ indices rewarded investors as corporate earnings continued to grow and companies were able to capitalize on prior years rationalization and costcutting initiatives. Slow but Steady US Economic Growth The US economy grew at approximately 3% in, and is forecast to grow at a slightly higher pace in The pillars of growth such as employment and housing have all shown relative strength and have broadly recovered. There remain headwinds regarding domestic policy in the US, and also some global challenges could slow economic growth and inject volatility into US capital markets, but nevertheless closed on a positive note. Record Low Interest Rate Environment The Fed continued its low interest rate policy throughout, which helped fuel US bond markets to record high issuances of investment grade bonds, and the second highest issuances of High Yield bonds, second only to 2012 s record. Companies sought funds to refinance at lower rates, to fund the improving mergers and acquisitions market in the second half of, and to recapitalize balance sheets and return capital to shareholders. A Hot IPO Market Initial Public Offerings as an asset class provided returns of 39% in, outperforming even the broader equity indices which reached record highs. A broad cross-section of industries were represented in the IPO class, with growth IPO stocks in the technology and biotechnology sectors enjoying particularly strong interest from the investment community. Annual US Capital Markets Watch 3

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7 US capital markets overview US capital markets as measured by debt and equity issuances continued their growth trend in, with a 5.5% increase to $1.72 trillion from $1.63 trillion in Economic growth for is slowly returning to the US, estimated to be approximately 3.0% in a low inflation environment with improving macroeconomic fundamentals, including employment and housing. Large amounts of investable capital on corporate balance sheets and in the investment community in a continued low interest rate environment, led to a search for yield in the US which helped fuel the broader equity markets to record highs, and the second highest high-yield bond issuances in US history. The increased volume and value of capital markets transactions was also driven by high financial sponsor activity, mostly on the sell-side in the IPO and follow-on equity markets as they sought to exit, and in the high-yield debt markets as they sought to undertake dividend recapitalizations. To a lesser extent, financial sponsors also tapped high-yield debt markets for acquisitions in a relatively quiet year for mergers and acquisitions activity. Figure 1 Summary of US capital markets activity 2011 Value ($ billion) $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 9% 86% $1.23T % $1.63T 22% $1.72T 86% 2012 Investment-grade debt High-yield debt Follow-on equity IPOs Convertible Source: PwC US IPO Watch, Dealogic, S&P LCD Annual US Capital Markets Watch 5

8 Fund flows measured on an annual basis in the US in saw a significant increase in investments in equities and relative outflows of investments from bond funds which were more popular in 2011 and This is due mostly to the continued low interest rate policy draining yield from bond funds, requiring investors to look to equities for yield and return. Looking at by month, money market funds came back into vogue during the summer as investors sought shelter from the uncertainty around US Federal Reserve s Federal Open Market Committee (Fed) policy, the government shutdown, and debt ceiling debate which began to bite into the broader markets. Bond funds saw net withdrawals start mid-year, and continued this trend for the remainder of as investors saw price declines as yield on 10-year treasuries rose. Shelf filings, which indicate the intent of US issuers to undertake both equity and debt capital markets transactions, have also increased over the period All of these factors combine to underline the strength and depth of US capital markets both in, and looking forward to Figure 2 Yearly net flows by fund type 2011 Value ($ billion) $500 $400 $300 $200 $100 $0 $-100 $-200 $120 Total 2011, net Total 2012, net Total, net Stocks and mixed equity funds Bond funds $ 36 Money market funds Source: Lipper Fund Flows Reports $ 9 $305 $ 32 $408 $ (82) $ (102) $ (19) Figure 3 Net flows by fund type Value ($ billion) $100 $50 $0 $-50 $-100 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Stocks and mixed equity funds Bond funds Money market funds Source: Lipper Fund Flows Reports 6 Annual US Capital Markets Watch

9 Outlook for 2014 US capital markets are likely to continue to show robust growth in the early part of 2014, despite the likelihood of moderated growth in the hot equity markets as investors step back and take a breather. The consensus for US economic growth is likely to remain in the 3% range, with little inflation. The market has recently shown a level of comfort with reduced levels of Fed bond purchases and prospective reductions, which is an overall vote of confidence that the economy will soon be able to stand on its own fundamentals of job growth, housing recovery, stable energy prices and other macro-economic factors. Europe and Asia also show positive outlooks for Potential headwinds do exist however, including continued discord about the levels of US government spending, federal and state debt levels and debt ceiling negotiations, possible geo-political events which may impact energy costs and have a destabilizing effect on national economies, and the impact of the inevitable rise in interest rates both directly on the Housing sector, but also in the wider context of increased borrowing costs impacting corporate earnings. Annual US Capital Markets Watch 7

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11 US equities markets Annual US Capital Markets Watch 9

12 US Equities Market Overview US stock markets indices closed at record highs in, with the S&P 500 closing the year up 29.6% at 1,848 which is the highest annual return since 1997 and the NASDAQ Composite closed the year up 38.3% at 4,177 which was the highest annual return since Driven by large amounts of investable cash chasing total return, improving corporate earnings, low volatility and improving macro-economic fundamentals, the markets steadily climbed throughout year. US equity markets also outperformed both the UK FTSE and Hong Kong s Hang Seng indices from 2011 to. Figure 4 Major global equity markets performance % 40% 20% 0% -20% % -60% -80% Source: S&P Capital IQ S&P500 NASDAQ FTSE 100 HANG SENG Against this positive market backdrop, equity products issued by both new and seasoned companies were well accepted by both the institutional investment community and retail investors. All categories of equity capital markets products showed strong growth from 2011 to, with follow-on offerings leading the way in terms of capital raised. Figure 5 Equity product summary by value % 19% 13% 73% 18% 9% 66% 20% 14% 0% 20% 40% 60% 80% 100% Follow-on offerings IPOs Convertibles Source: PwC US IPO Watch 10 Annual US Capital Markets Watch

13 The US IPO Market The US IPO market was the most robust market seen since 2007 as investors sought growth. Total IPO volume for saw 238 public companies raising $56.9 billion, far surpassing overall volume of 146 IPOs raising $42.9 billion in These proceeds included six IPOs that raised $1 billion or more in, compared to just four IPOs in IPO issuances remained steady throughout the year with relatively low volatility in the equity markets. IPOs as an investment returned 39% for the year. Figure 6 Annual US IPO value and volume $ 92.6 $ $ 51.9 $ 56.9 $ 49.9 $ 37.9 $ 39.0 $ 42.9 $ $ 35.5 $ 26.4 $ $ 29.4 $ $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Value ($ billion) Value Source: PwC US IPO Watch Continuing to build on improving investor momentum from 2012, the IPO market started off with a strong January, mostly due to an increase of net inflows into equities and reduced uncertainty surrounding macro-economic events. This trend continued into the second quarter, marked by May s 30 IPOs for a total of $6 billion, the highest value seen in any one month since November 2007; only to be eclipsed by 33 IPOs raising $12.3 billion in proceeds in October. Despite increased volatility throughout June as a result of investor uncertainty regarding the future actions of the Fed, the second quarter had a strong finish. In the third quarter, the IPO market experienced continued momentum, particularly in its final weeks with global equity funds seeing increased inflows and the Fed s continued delay of tapering of its quantitative easing program. More recently, the fourth quarter was marked by consistent low volatility, despite a slight pullback in IPOs during the budgetary debate and debt ceiling negotiations. IPO volume and proceeds raised peaked during the fourth quarter of, with a third of the yearly volume and four of the top five largest issuances occurring in the last three months of the year. For the purposes of this publication, US IPOs include domestic and foreign IPOs listed on the NYSE and NASDAQ. IPOs do not include unit investment trusts, commodity trusts, and fully classified closed-end funds. Annual US Capital Markets Watch 11

14 The IPO market is broadly correlated to the level of volatility in the broader equity markets. The equity markets saw relatively low levels of volatility in, supporting the IPO market. Since January 2011, of the 518 IPOs that took place, 50% occurred when the Chicago Board Options Exchange Volatility Index (VIX), measure of implied volatility of the S&P 500, was trading between 15 and 20 and 87% of all IPOs occurred when the VIX was trading below 20. These periods of relatively low volatility in the equity markets generally promotes investor confidence. Figure 7 US IPO volume and vix range VIX up Source: PwC US IPO Watch The trend for volatility has been a steady decline since spiking in the third and fourth quarter of 2011, due to the downgrade of the US credit rating and the Eurozone crisis. While the VIX briefly rose above 20 in June and October due to political and fiscal uncertainties, it remained low throughout most of the year. After the resolution of the Congressional budgetary debate and debt ceiling negotiations in October, IPO activity surged with 77 deals occurring in the fourth quarter of. Figure 8 US IPO volume and market volatility Q Q Q Q Q Q Q Q Q Q Q Q Q1 63 Q2 64 Q3 77 Q VIX VIX Source: PwC US IPO Watch and quarterly VIX average 12 Annual US Capital Markets Watch

15 Industry analysis In, the Healthcare sector led IPO activity in terms of volume with 54 IPOs raising $8.6 billion, or 23% of total volume. Technology and Financial sectors followed with 51 and 33 deals, respectively, for a combined 35% of total volume for the year. The Energy and Consumer sectors delivered the highest amount of proceeds, contributing $10.9 billion and $10.3 billion, respectively, representing a combined 37% of proceeds. Technology placed third with $9.2 billion, or 16% of total proceeds. Figure 9 US IPO value by industry 2011 REIT, 6% Energy, 18% Industrial, 9% Consumer 18% 2011 Healthcare, 13% Technology, 25% Financial, 11% REIT, 4% Energy, 13% Industrial, 9% 2012 Consumer, 8% Financial, 16% Healthcare, 2% Technology, 48% REIT, 10% Energy, 19% Industrial, 12% Healthcare, 15% Technology, 16% Financial, 10% Consumer, 18% Source: PwC US IPO Watch Over the past three years, both the Healthcare and Financial sectors have experienced the most growth in number of offerings. The Healthcare sector more than tripled the number of IPOs from 15 in 2011 to 54 in, largely driven by the biotechnology sector, with the market showing appetite for breakthroughs and personalization of medicine with genetic therapies and specialty pharmaceuticals. The predominance of smaller biotechnology IPOs has seen the average proceeds per IPO in the healthcare sector decrease from $310 million in 2011 to $160 million in. The Energy sector also experienced growth in average proceeds from 2011 to, with the average proceeds per IPO increasing 36%. The Energy sector was buoyed by the boom in U.S. oil and gas exploration and development companies utilizing new recovery and exploration methods. This boom extended to oil and gas infrastructure companies as well, such as Plain GP Holdings, the largest IPO of the year, raising $2.8 billion. Figure 10 US IPO volume and value by industry 2011 Value ($ million) Healthcare $4,648.3 $851.9 $8,647.7 Technology , , ,176.7 Financial , , ,663.5 Consumer , , ,327.8 Industrial , , ,545.9 Energy , , ,949.1 REIT , , ,549.6 Total $35,479.6 $42,871.6 $56,860.3 Source: PwC US IPO Watch Annual US Capital Markets Watch 13

16 Top 10 IPOs The Top 10 US IPOs of raised $15.9 billion of proceeds compared to $24.6 billion in However, excluding the $16 billion Facebook IPO, 2012 total proceeds would have been just $8.6 billion, or 85% higher in. The Top 10 IPOs contributed 28% of the total proceeds in, down from the 58% of total proceeds generated in Average Top 10 deal size in reached $1.6 billion, down from the $2.5 billion from the average Top 10 size in 2012, but up from the 2012 average of $958 million if the Facebook IPO is excluded. Six of the Top 10 IPOs, raised more than $1 billion, with three of those raising in excess of $2 billion. As with prior years, IPOs raising between $50 million and $500 million made up the vast majority of issuances. The number of IPOs exceeding $1 billion of proceeds remained relatively constant from 2011 to. The $50 million to $149 million range experienced the most growth in with increases in both Financial and Healthcare sectors. The Healthcare sector increased from 10 IPOs in 2012 to 36 IPOs in, led by biotechnology issuers. Figure 11 Top 10 US IPOs Company Name Value ($ million) Exchange Sector Plains GP Holdings LP $ 2,816.0 NYSE Energy Hilton Worldwide Holdings 2,352.8 NYSE Consumer Zoetis Inc. 2,238.6 NYSE Healthcare Twitter Inc. 1,820.0 NYSE Technology Antero Resources Corp 1,571.9 NYSE Energy ING US 1,271.2 NYSE Financial Coty Inc. 1,000.0 * NYSE Consumer Envision Healthcare Holdings Inc NYSE Healthcare HD Supply Holdings NASDAQ Industrial Quintiles Transnational Holdings NYSE Healthcare Total $15,941.3 * Rounded up to $1 billion Source: PwC US IPO Watch Figure 12 US IPO volume by range of offering values $1 billion + $500 $999 million $150 $499 million $50 $149 million Less than $50 million Source: PwC US IPO Watch 14 Annual US Capital Markets Watch

17 Financial Sponsor backed IPOs Financial sponsors remained active participants in the IPO market. Of the 238 IPOs in, 145 were backed by financial sponsors, which represented 61% of the total volume and 63% of total proceeds raised ($35.7 billion). While the overall share of IPOs backed by financial sponsors declined 6% in as compared to 2012, there was a 50% increase in volume and 14% increase in value over the 97 financial sponsor-backed IPOs in Financial sponsors continued to take advantage of the strong equities market and improving financial conditions of portfolio companies to gain liquidity and monetize their investments. Financial sponsor-backed IPOs were most common in the Technology and Consumer sectors with 87% of technology deals and 79% of Consumer IPOs being backed by financial sponsors. Financial sponsors were least active in the REIT and Financial sectors, backing less than 45% of the IPOs in each of the sectors. The average deal size of a financial sponsor-backed IPO decreased to $246 million in a 24% decrease over the $323 million seen in 2012, while the median size financial sponsor deal increased 29%. Figure 13 Financial sponsor backed US IPOs 2011 Value % 20% 40% 60% 80% 100% $27,440.0 $8,039.6 $31,289.9 $11,581.7 $35, % 20% 40% 60% 80% 100% Source: PwC US IPO Watch Financial sponsor backed Non Financial sponsor backed Figure 14 Financial sponsor backed IPO sizes 2011 Mean and median values of financial sponsor-backed IPOs vs. other IPOs (proceeds in U.S. $ millions) $21,196.5 Mean Median Mean Median Mean Median Financial sponsor backed $ $ $ $ 95.0 $ $ Non Financial sponsor backed $ $ $ $ $ $ Source: PwC US IPO Watch Annual US Capital Markets Watch 15

18 Figure 15 Financial sponsor backed IPOs by industry Financial sponsor backed Non Financial sponsor backed Healthcare $4,982.1 $3,665.6 Technology $8,004.4 $1,172.3 Financial $2,544.7 $3,118.8 Consumer $8,119.1 $2,208.7 Industrial $4,282.8 $2,263.1 Energy $5,523.8 $5,425.4 REIT $2,206.9 $3, % 20% 40% 60% 80% 100% Source: PwC US IPO Watch Financial sponsors are typically not using the IPO as a vehicle to provide more liquidity to the investments and received more proceeds (11%) than other selling shareholders (3%), excluding spin-off IPOs. Among the 13 spin-off IPOs, four had selling shareholders with Zoetis and ING US representing the dominant share. If spin-off IPOs are included, selling shareholders represent 17% of the proceeds from IPOs. Figure 16 Financial sponsor backed US IPOs use of proceeds 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 5% 5% 5% 9% 11% 86% 84% Financial sponsor backed 8% 3% 22% 86% 92% Non Financial sponsor backed excluding spin-off IPOs 17% 78% Non Financial sponsor backed Issuer Selling shareholder Underwriter Source: PwC US IPO Watch 16 Annual US Capital Markets Watch

19 Non-US issuers Non-US issuers, as defined by issuer domicile, completed 42 IPOs in and raised $8.0 billion. This represents 18% of the total volume and 14% of the total proceeds for the year. Of the 42 IPOs, the majority were domiciled in the Cayman Islands, Bermuda, and the Marshall Islands. Domiciling a company offshore for the purpose of an IPO can provide additional options not available in a company s home country when it comes to certain laws and governance. Of the Cayman Island IPOs, most of the companies are of Chinese origin. The Marshall Islands has long had favorable laws for maritime shipping and all five of the IPOs are maritime shipping IPOs. Of the five Bermuda domiciled IPOs, three are Financial sector and one is a maritime shipping company. Dual listings Dual listings are IPOs which are listed in a foreign country and the US. In there were 11 dual listings, compared to the two dual listings in 2012 and four dual listings in European and Canadian listed companies had the highest volume of dual listings in. Figure 17 Foreign domiciled US IPOs Value % 20% 40% 60% 80% 100% $27,581.0 $7,899.0 $37,482.1 $5,389.6 $48,814.2 $8, % 20% 40% 60% 80% 100% US Non-US Source: PwC US IPO Watch Foreign filers came to the US markets from all around the world, with issuers headquartered in 20 countries. Annual US Capital Markets Watch 17

20 Post-IPO performance During, the Dow Jones Industrial Average rose 26.5%, while the NASDAQ increased 38.3%. Average year-to-date return on IPOs overall was above these levels at 39%, with 66% of IPOs generating a positive return by year end. The Consumer, Healthcare, and Technology sectors saw aboveaverage growth with returns of 41%, 55%, and 51%, respectively. One day returns were highest in the Consumer and Technology sectors, with returns of 32% and 28%, respectively. Figure 18 US post-ipo performance 50% 40% 30% 20% 10% 0% 16% Average one day return for IPOs 39% IPOs from IPO date 38% 26% 30% NASDAQ Dow Jones S&P500 Source: PwC US IPO Watch and Dealogic Figure 19 US post-ipo performance by industry 60% 50% 40% 30% 20% 10% 0% -10% 32% Consumer 41% 51% 31% 28% 5% Financial Technology 6% 28% Energy 55% 29% 19% 9% Industrial Healthcare 0.7% REIT -0.4% +1Day Source: PwC US IPO Watch and Dealogic The performance percentages represent the average return of companies stock price between their IPO date and December 31,. 18 Annual US Capital Markets Watch

21 Financial sponsor backed IPOs post-ipo performance The results exceeded 2012 on the basis of both single day returns and a year-to-date basis. Companies without financial sponsors saw average one day gains of 9.0% on their first day basis and 37% on a year-to-date basis, with an average deal size of $228 million. Financially sponsored companies posted returns of 21% on a first day basis and 41% on a year-todate basis, with an average deal size of $246 million. Performance by size Of the total 238 IPOs in, 96 were below $100 million, 136 were between $100 million and $1 billion, and 6 companies exceeded $1 billion. In, the best single day performers were the largest offerings. The offerings greater than $1 billion posted an average return of 21%, compared to 18% in the $100 million to $1 billion range and 15% under $100 million. This outsized return was a result of Twitter s $1.82 billion offering, which posted a 73% single day return and 145% year to date and ING which posted an 80% return year-to-date. Of the 96 offerings below $100 million, 73% produced positive returns year-to-date, while in the $100 million to $1 billion, 82% of the 136 companies produced positive year-to-date returns, indicating greater variances in the returns across the smaller IPO offerings. Figure 20 Financial sponsor backed Post-IPO performance 50% 9% 41% 8% 22% 40% 86% 86% 37% 30% 21% 20% 10% 9% 0% Financial sponsor backed Non financial sponsor backed +1 Day Source: PwC US IPO Watch and Dealogic Figure 21 IPO returns by issue size 60% 9% 8% 22% 55% 50% 86% 47% 86% 40% 33% 30% 20% 21% 18% 14% 10% 0% Less than $100m $100m $1 billion Greater than $1 billion +1 Day Source: PwC US IPO Watch and Dealogic The performance percentages represent the average return of companies stock price between their IPO date and December 31,. Annual US Capital Markets Watch 19

22 Figure 22 US IPO one day returns 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% 73% 30% 33% 19% 20% 14% Healthcare Technology 35% 22% 23% 4% 6% 7% 8% 7% 3% 9% 1% (4%) (1%) Financial Consumer Industrial Energy REIT Less than $100m Source: PwC US IPO Watch and Dealogic $100m $1 billion Greater than $1 billion Figure 23 US IPO returns from IPO date 160% 140% 145% 120% 100% 80% 60% 40% 20% 0% -20% 62% 39% 26% Healthcare 54% 45% Technology 80% 51% 52% 25% 34% 29% 33% 21% 12% 11% 12% 2% (9%) Financial Consumer Industrial Energy REIT Less than $100m Source: PwC US IPO Watch and Dealogic $100m $1 billion Greater than $1 billion The performance percentages represent the average return of companies stock price between their IPO date and December 31,. 20 Annual US Capital Markets Watch

23 IPO pricing range Pricing range provides some insight into the strength of the IPO market. Although price ranges are revised based upon perceived investor demand, when a higher proportion of IPOs are finally priced above the pricing range this can indicate strong interest. In, 54% priced below the range compared to 52% in However, in, 22% priced above the range, compared to 16% in In, the Healthcare sector had the largest percentage (31%) of companies priced below the range, while the Consumer sector led the way with 38% of companies pricing above the range followed by the Technology sector at 35% pricing above the range. The REIT (80%), Financial (67%), and Healthcare (54%) sectors led with the most pricings within the range. Figure 24 US IPO pricing range % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 9% 25% 86% 33% 42% Priced above the range Source: PwC US IPO watch 8% 16% 22% 86% Priced within the range 32% 52% Priced below the range 22% 24% 54% Annual US Capital Markets Watch 21

24 Transaction statistics by Size and Industry The magnitude and scope of IPO costs can vary as a result of a number of factors such as the size of the offering, complexity of the structure, and readiness of the organization. Direct costs attributable to the offering typically include fees for underwriters, financial reporting (both auditor and financial advisor), legal, project management, printing, and exchange listing. The underwriter discount fee is generally a percentage of the gross proceeds from the offering, and it is typically the largest cost to the issuing company. The average underwriting fees for companies undertaking an IPO in were 6.4%, and ranged from 2.7% to 9.5%. Overall, 89% of IPO underwriting fees in were within the 5% to 7% range, with IPOs greater than $1 billion averaging 3.6%. Among the largest IPOs in and 2012, the average number of banks utilized to distribute shares increased substantially to over 24, up substantially from 13 in In terms of sectors, Technology and Healthcare IPOs had the highest average fee percentages paid to underwriters. In general, the percentage of the company sold generally decreases as the value of the deal increases, due to distribution channel constraints to retail and institutional investors. Consistent with prior years, SPACs (74%), classified in the Financial sector, had the largest percentage of the company sold in the IPO, followed by REITs (50%) and Industrial (35%). Figure 25 IPO transaction statistics by size 2011 Pricing Date Deal Value Average % Company Sold Average # Banks Average Underwriters Fee 2011 Less than $100m 35.4% % $100m to $1 billion 31.7% % Greater than $1 billion 23.2% % 2011 Total 32.8% % 2012 Less than $100m 38.0% % $100m to $1 billion 28.4% % Greater than $1 billion 44.6% % 2012 Total 33.5% % Less than $100m 33.2% % $100m to $1 billion 31.4% % Greater than $1 billion 19.0% % Total 31.8% % Source: Dealogic For a deeper discussion on costs associated with IPO see PwC s Considering an IPO? The costs of going and being public may surprise you. 22 Annual US Capital Markets Watch

25 Yield-based IPOs REITs and MLPs REIT IPOs in have raised the most proceeds since 2004, but they have underperformed in the aftermarket compared to trading indices primarily due to the threat of rising interest rates. 10-year treasury yields continued to rise during, impacting the REIT market, since REIT s pay out 90% of their income in dividends, and they must borrow to finance growth. REIT earnings are becoming increasingly driven by increases in gross rental rates, as opposed to increasing occupancy rates which had been the primary focus. The overall average dividend yield for REITs at IPO has declined since The average REIT dividend yield of 6.9% is down from 2011 s 8.2% and is in line with the dividend yield in MLPs are also a yield type IPO and also pay out dividends. Average dividend yields for MLPs in have increased 31% over 2012, returning to surpass the levels seen in Figure 26 REIT and MLP yields Total IPOs REITs Average REIT Dividend 8.2% 6.8% 6.9% REIT IPOs MLPs Average MLP Dividend 7.6% 5.9% 7.7% MLP IPOs Source: S&P Capital IQ, SEC Filings Dividend yields in all periods are calculated utilizing the most recent dividends paid as a percentage of the stock price close on December 31,. If in, a dividend was not paid, the dividend yield was calculated based upon the estimated dividend from the final prospectus as a percentage of the IPO price. Annual US Capital Markets Watch 23

26 The JOBS Act The Jumpstart Our Business Startups Act (the JOBS Act or the Act) became effective on April 5, 2012 and continued to evolve throughout. A key goal of the JOBS Act is to encourage job creation and economic growth by improving access to the public capital markets for an Emerging Growth Company (EGC). Among meeting other criteria, an issuer is classified as an EGC if it 1) has gross revenues less than $1 billion during its most recently completed fiscal year, 2) has not issued more than $1 billion in non-convertible debt during a three-year period, and 3) is not a large accelerated filer. Title I of the Act provided immediate benefits to EGCs through the IPO on-ramp that allows for reduced financial disclosure requirements for companies filing for IPO. Titles V and VI of the JOBS Act increased the threshold for mandatory registration with the SEC by increasing the number of shareholders of record to 2,000, as long as there are less than 500 non-accredited investors. The requirement for banks classified as EGCs also increased to 2,000 shareholders of record with no limitation on non-accredited investors. Title IV increases the Small Issuer Exemption granted under Reg. A from $5 million to $50 million. Under Title I of the JOBS Act, companies have the ability to file draft Form S-1s confidentially with the SEC up until 3 weeks before the expected pricing date. This privilege was previously only granted to foreign filers and was designed to allow companies to begin the process without divulging potentially confidential company specific information. Before the JOBS Act allowed for confidential filings, the average number of days between initial filing of the Form S-1 and pricing was 195. Following the creation of the JOBS Act, EGC s averaged 125 days for EGCs that elected to file confidentially, with filings remaining confidential for an average of 75 days. All other filers, excluding foreign filers were 232 days between filing and pricing. Figure 27 Pre and post JOBS act average number of days in filing Post-JOBS act for EGC confidential filers Post-JOBS act for all other filers Pre-JOBS act , Source: SEC Filings, excludes foreign filings In confidential filing Number of days In public filing Figure 28 Percent of EGC pricings that filed confidentially % 80% 91% 86% Q1 Q2 Q3 Q4 Quarters following effective date of JOBS Act Source: SEC Filings, represents companies that went public in each quarter, and excludes foreign filings 24 Annual US Capital Markets Watch

27 A growing percentage of EGCs have elected to file confidentially under the provisions allowed in the JOBS Act. The proportion of EGCs doing so has steadily grown through Q4 to over 80%. Effective on September 23, for Title II, startups and small businesses are no longer prohibited against general solicitation or general advertising to accredited investors in Rule 506 of Regulation D offerings, or QIB s in Rule 144A offerings. This increases the likelihood that companies can successfully raise capital, as they can reach more investors through the internet, social media and alternative avenues. Title III covers the most highly publicized component of the JOBS Act, crowdfunding. On October 23, the SEC filed a request for public comment on proposed rules for crowdfunding based on Title III. The proposed rules allow for the offer or sale of securities to be exempt from the provisions of Section 5 if the total amount sold to all investors is less than $1 million, and the transaction was completed through a broker or funding portal. It also sets limits on the amount that can be raised through any individual investor. In addition, the proposed rules establish a framework of tiered financial disclosure requirements and number of years of audited financial statements based on aggregate target offering amounts. Figure 29 EGC IPOs and confidential filings % 86% Total IPOs Source: SEC Filings, excludes foreign filings 8% 22% 86% 167 Total EGC IPOs 136 Total confidential filings Figure 30 Average number of days in confidential filing and public filing EGC-filed confidentially Non-EGC s EGC-only filed publicly In confidential filing Source: SEC Filings, excludes foreign filings 51 Number of days In public filing Annual US Capital Markets Watch 25

28 The equity follow-on market Follow-on offerings represent any subsequent offering of equity after an IPO, reverse merger, or spin-off, and follow-on offerings increased in both value and volume in. Through December 31,, equity markets had seen 785 follow-on offerings, versus 238 IPOs, and $184.0 billion in proceeds raised, versus $56.9 billion of IPO proceeds raised. The follow-on market continues to represent a dominant share of equity capital markets offerings. From a volume standpoint, Healthcare led the way, with 164 follow-on offerings, followed by Technology, Energy, and REITs. On average, Healthcare and Technology follow-on offerings were much smaller in size than those in the Energy, REIT, and Industrial sectors. The Energy, REIT, and Industrial sectors represented the largest portions of the follow-on market in, with $38.5 billion, $34.2 billion, and $30.2 billion in proceeds raised respectively Of the follow-on offerings in, 203 were related to financial sponsors, or about 26%, indicating that corporations see the follow-on market as an effective way to raise capital. Financial sponsor backed companies, on average, participated in larger follow-on capital raises than non financial sponsor backed companies in ; sponsors raised $67.6 billion in proceeds through the follow-on market in, or 37%. In addition, PwC performed an analysis over the last three years of IPOs and related follow-on offerings. Of the companies that went public between 2011 and, approximately 38% went on to do follow-on offerings. For companies that went public between 2011 and and subsequently participated in follow-on offerings, the median days between IPO and follow-on was 274. For financial sponsor backed follow-ons, that time period was slightly shorter at 228 days. For those same financial sponsor backed companies, the median years between buy-out and IPO was 4.6. The average amount of secondary shares sold in those follow-on offerings by financial sponsors in was 22%, indicating that financial sponsors are likely to exit their investments over time via multiple transactions such as IPOs and through repeated follow-on offerings. Figure 31 US follow-on value and volume , Source: Dealogic $ Value $ Figure 32 US follow on by industry $17.6 Healthcare Source: Dealogic $ Technology $12.9 Financial $17.8 $30.2 $38.5 $ $ Value Consumer Industrial Energy REIT $200 $150 $100 $50 $0 $50 $40 $30 $20 $10 $0 Value ($ billion) Value ($ billion) 26 Annual US Capital Markets Watch

29 The convertible market The quantity and overall value of convertible debt issuances was up in compared to 2012, consistent with the overall robust equity markets. There were a total of 154 issuances totaling $38.6 billion for the year, an increase of 95% and 99%, respectively, over the prior year numbers. In terms of sectors, Technology led the way with 48 convertible issuances, which comprised approximately 31% of all issuances, for $16.6 billion. Healthcare and REITs followed, with 31 and 23, respectively. Overall, Technology issuance was up from just 13 (16% of total) in The Technology sector also had the largest average issuance size, at $346 million, followed by the Consumer sector at $280 million and the Energy sector at $253 million. Of the 154 issuances, 57 had repaying debt as their primary use of proceeds and 58 were for general corporate purposes. The remainder was for acquisitions, expansion, planned future acquisitions, or repurchases. Figure 33 Convertible debt value and volume Source: Dealogic $ $ Value Figure 34 Convertible debt by industry $4.9 Healthcare $16.6 $2.3 $2.4 $4.3 $ $ Technology Financial Value $2.5 Consumer Industrial Energy REIT $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 $20 $15 $10 $5 $0 Value ($ billion) Value ($ billion) Source: Dealogic with PwC industry classification Convertible debt only includes offerings by publicly listed companies where they are from SEC filings or are compiled through public company information sources by Dealogic. Annual US Capital Markets Watch 27

30 US debt arkets

31 US Debt Markets Annual US Capital Markets Watch 29

32 US Debt Markets Overview The US debt markets continued its strong momentum from 2012 into. Despite the uncertainty of the fiscal cliff, the bond market remained robust due to the support of the Fed s quantitative easing program, continued investor demand, and expectation of modest economic growth with low inflation. The 10-year Treasury yield started off in January at 1.86% gradually increasing throughout the year, peaking at 3.02%, its highest since July Discussions of tapering the Fed s quantitative easing policy and positive economic indicators stirred up uncertainty in the debt markets in May, as investors sought to take profits. By the end of June, the 10-year Treasury yield increased to 2.60%. Over the summer, the 10-year Treasury yield drifted up until the Fed announced it would not begin tapering. New issuances gained steam, as companies sought to take advantage of the low rates across the debt markets. In December, the Fed ultimately announced a reduced bond purchasing program from $85 billion per month to $75 billion per month. Investment-grade companies were attracted by falling borrowing costs in the bond market, which resulted in some of the largest bond offerings seen. The high-yield issuers took advantage of extending and amending existing debt in an environment where investors appetite for yield led to a greater tolerance of risk. High-yield bonds had the second largest year on record, after Figure year US Treasury and bond rating yields-to-maturity 6.0% 5.0% Yield (%) 4.0% 3.0% 2.0% 1.0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec US Treasury 10-year A BBB BB Source: Bloomberg Domestic yield curve by rating 30 Annual US Capital Markets Watch

33 The High-Yield Debt Market The US high-yield bond market had a very strong, falling just short of record levels from 2012, reaching $323.6 billion from 653 issuances. In Q1, bond funds continued to pour capital into the high-yield asset class, taking advantage of lowered borrowing costs. These lower costs also allowed existing debt to be refinanced and extended. This issuance trend continued through mid-may, until the demand for highyield issuances slowed due to the Fed s announcement of the plan to taper quantitative easing, leading to selling pressure from high-yield investors and lower CLO issuances. Even with this slowdown, issuances in Q2 still reached $82.5 billion compared to $90.4 billion in Q1. Activity in the high-yield market picked up again in August; however, the market began to shift away from refinancings and extending maturities, towards merger and acquisition related business. Uncertainty surrounding Fed policy coupled with Congress October debate over the Federal Budget and debt ceiling, created greater levels of volatility in the capital markets, which resulted in a slowdown in high-yield issuances. However, by late October the markets regained some confidence and new issuances began to recover. During this period, concerns about issuer credit-quality, covenant-lite lending and the increase in 144A for-life issuances did not weigh on the market as issuers continued to take advantage of the open window for low rates amid continuing Fed bond buying. Additionally, PIK toggle notes continued to gain in popularity. By late November, year-to-date issuances reached the $300 billion mark for only the second time in history; the first was 2012 s record $344.8 billion. Figure 36 US high-yield debt value and volume $78.0 $ $24.7 $35.6 $ $ $ $94.9 $ $82.5 $ $ $120 $105 $90 $75 $60 $45 $30 Value ($ billion) Q Q Q Q Q Q Q Q4 Q1 Q2 Q3 Q4 $15 $0 Value Source: S&P LCD Annual US Capital Markets Watch 31

34 Figure 37 High-yield value and volume 180 $ $43.5 $47.7 $ $ Jan $ Feb $ Mar $ Apr 95 May $ Jun $ Jul $ Aug 67 Sep $ Oct $19.8 $ Nov Dec $40 $30 $20 $10 $0 Value ($ billion) Value Source: S&P LCD Issuers of high-yield bonds in used the proceeds predominantly for refinancing, although its relative share has decreased from 2012 partly due to companies opportunistically accessing the bond market for increased levels of dividend recapitalizations. LBO financings slightly decreased as asset prices remained high, and financial sponsors focused on investment exits rather than new portfolio acquisitions. Refinancing activity in accounted for $162.2 billion from 348 issuances, slightly down from 2012 which had $201.8 billion from 387 issuances. Acquisitions and LBOs accounted for $70.9 billion and 123 deals in compared to $73.8 billion and 142 deals in Figure 38 High-yield use of proceeds Project financing, Expansion/capex, 1% 2% Recap/stock repurchase, 3% Recap/dividend, 6% Corp purpose, 7% 2011 LBO, 7% spinoff, 1% Recap/general recap, 1% Other, 2% Refinancing, 54% Project financing, 1% Recap/general recap, 2% Recap/dividend, 5% LBO, 6% Corp purpose, 10% Spinoff, Recap/stock 1% repurchase, Recap/general repurchase, 1% 2% Other, 1% Recap/stock repurchase, 4% LBO, 5% Recap/dividend, % Refinancing, 58% Corp purpose, 14% Merger, 1% Expension/capex, 1% Other, 2% Refinancing, 50% Acquisition, 16% Source: S&P LCD Source: S&P LCD Acquisition, 16% Acquisition, 16% 32 Annual US Capital Markets Watch

35 High-yield spreads tightened in, compared to 2012 and yield-to-maturity (YTM) was driven to multi-year lows. The search for yield by investors has helped drive the highyield market. Investors perception of risk versus yield has improved over the recent years, shifting from B to BB bonds and also increased higher yielding CCC offerings. Figure 39 High-yield average yield-to-maturity and spreads S&P Bond Ratings Average Yield & Spread (bps) Average Yield & Spread (bps) Average Yield & Spread (bps) BB 6.78% 6.01% 5.52% T+415 T+453 T+368 B 8.76% 8.07% 7.29% T+601 T+663 T+560 CCC 10.03% 9.52% 8.53% T+732 T+820 T+675 Source: S&P LCD Nominal yield spread above benchmark US Treasury. Figure 40 High-yield debt by rating 2011 CCC, 11% CCC, 11% CCC, 16% 2011 BB, 39% 2012 BB, 37% BB, 46% B, 50% B, 52% B, 38% Source: S&P LCD Looking at overall value, the Consumer, Technology and Energy sectors led the high-yield bond markets with $96.3 billion, $67.4 billion and $54.7 billion, respectively. The Consumer sector also led in volume with 205 issuances. Dish DBS, General Motors, Caesars and Heinz led Consumer with issuances for an acquisition, stock repurchase, general recapitalization, and leveraged buyout, respectively. Technology proceeds grew 57% in over 2012, while 2012 showed 35% growth over T-Mobile, Sprint, and Metro PCS led the Technology sector with over $20.6 billion in proceeds. Consistent with the equity markets, the Energy sector continued to have strong results due to the increase in domestic energy production and low interest rates. Cheniere Energy, Chesapeake Energy, and Whiting Petroleum led the sector with issuances to refinance existing debt. Annual US Capital Markets Watch 33

36 Figure 41 High-yield by industry 2011 Value ($ million) Consumer $ 50,636 $ 92,014 $ 96,327 Industrial ,596 69,586 47,892 Energy ,253 60,602 54,695 Technology ,621 42,776 67,355 Financial ,945 53,245 37,330 Healthcare ,294 26,556 19,995 Total $ 218,345 $ 344,779 $ 323,594 Source: S&P LCD with PwC industry classification Rule 144A, provides a non-exclusive safe harbor from the registration requirements of the Securities Act of 1933 by restricting resale of any restricted securities to only qualified institutional buyers. The rule was designed to make the US capital markets more accessible and less expensive to issuers by reducing the financial reporting burden, while introducing liquidity into the private placement market. Under Rule 144, high-yield bond offerings with registration rights are not required to make public disclosures until they become public debt, at which time existing debt will be exchanged for an identical series of registered bonds which are subject to SEC reporting requirements. Since 2011, 144A for life issuances, which are traditional Rule 144A securities with the added exception of not having the requirement to ultimately register the securities, have experienced the most growth with value increasing by 182% from $34.4 billion to $97.1 billion in. During, the market s growing appetite for yield has resulted in less pressure on restrictive covenants followed by the significant increase in Rule 144A for life over prior periods. Some market participants may see the rise in 144A for life as a potential investment risk as borrowers will not be held to the same SEC reporting requirements as traditional Rule 144A filers. While the terms are generally more expensive for the 144A for life, given the historic low prices, companies have opted to take advantage of the reduced reporting requirements in exchange for more expensive debt. Figure 42 High-yield type 2011 Value ($ million) A $129,790 $179,423 $173, A for life ,393 73,961 97,080 Public ,842 91,395 52,670 NA , Total $218,345 $344,779 $323,594 Source: S&P LCD 34 Annual US Capital Markets Watch

37 The Investment-Grade Debt Market was another strong year for investment-grade debt issuances, with another trillion-dollar plus year in a continued low interest rate environment. In Q1 of, momentum continued from 2012, raising $294.8 billion in value through 853 issuances. Despite a dip at the end of Q3, the year ended strong, finishing with $1.114 trillion in volume and 3,117 issuances, slightly up from $1.06 trillion in volume in 2012 and $823 billion in The Financial sector led the way in January, capturing $64.7 billion (53%) of the value issued during the month. Companies continued to take advantage of attractive borrowing rates with a heavy demand for debt as well as strong inflows. In April, Apple issued $17 billion of bonds, while Petrobras issued $11 billion the following month. In May, the Fed hinted at a reduction of its $85 billion per month bond purchasing arrangement causing a sharp increase in the 10-year Treasury yield, which rose to 2.49% from 2.16% at the end of May and from 1.68% in April. The rise in Treasury yields created a sell off of investment-grade bonds in June which resulted in a lackluster month for new issuances compared to first five months of the year. By July the credit markets were calmed by the Fed s announcement to continue its existing policy of monthly asset purchases. The threat of rising interest rates crowned September as the strongest month of the year for investment-grade offerings with $151.4 billion in proceeds, which was led by Verizon s $49.5 billion bond offering to help finance the buyout of Vodafone s ownership in Verizon Wireless. Sales of investment-grade bonds dipped in October due to the volatility driven by political uncertainty surrounding the first government shutdown in 17 years and Congress dispute over the debt ceiling. 69% of proceeds for the month were issued after Congress had passed legislation on October 16th, funding the government for another three months. Sensing the heightened changes of rising interest rates and cuts in the Fed s asset purchasing program, companies again took advantage of the favorable market conditions to issue new debt and lock in lower rates. Figure 43 US investment-grade debt value and volume $ Q1 $ Q2 $ Q3 $ Q4 $ Q1 $ Q2 $ Q3 $ Q4 $ Q1 $284.5 $ Q2 750 Q3 $ Q4 $350 $300 $250 $200 $150 $100 $50 $0 Value ($ billion) Value Source: Dealogic Annual US Capital Markets Watch 35