IPO resurgence depends on US corporate earnings

New York: The volatility in the stock market has eased, the banking system is steadier, and the most recent initial public offering (IPO) is steady.

Despite that good news, the slow US IPO market is unlikely to rebound until at least the middle of 2009, as investors traumatised by sharp drops in the stock markets this year will continue giving IPOs the cold shoulder, bankers say.

Much will hinge on the upcoming earnings season in late January, which will give investors a sense of how long the recession might last, and when companies give their outlook for the year, one banker said.

"We're going to have the opportunity to test investor sentiment and market stability," said Mary Ann Deignan, head of equity capital markets for the Americas at UBS Investment Bank.

Still, the VIX Market Volatility Index, has fallen to about 45 from a record close of 80.86 in November, an encouraging sign.

"The stock markets don't need to be high, or even going up, they just need to be stable," said Doug Baird, co-head of equity capital markets at Banc of America Securities, adding that the VIX would need to fall below 30 to have any real effect on IPOs.

Another question mark will be the extent to which the current crisis curbs investors' ability to invest in IPOs.

"If there's been enough wealth destruction that it takes longer than normal for mutual funds to re-collect assets - that would prolong the drought," Baird said.

That drought, which has worsened in recent months, led to a 43 per cent decline in IPO volume over 2007. There has only been one IPO since August, a $126 million deal by online university operator Grand Canyon Education in November, one of the rare IPOs in 2008 still trading above its offer price.

The tough market in 2008 prompted 102 companies to pull out of the IPO pipeline, which now holds 127 IPOs estimated to raise $26.2 billion, according to Thomson Reuters data.

Of those, the larger, more established ones are most likely to be first out of the gate, the bankers said.

"Well-known, well-regarded brands are less risky than the start up doing the $75 million IPO," Bank of America's Baird said. Such brands will get first crack at the market when it reopens, he added.

One of the largest deals in the pipeline is by Cloud Peak Energy, a US coal producer, which is aiming for a $1 billion IPO.

Energy companies make up the largest group in the pipeline, with 20 prospective IPOs. Other major sectors include high tech, with 19 companies, and the healthcare industry with 13.