A surge in stock offerings could be coming to a market that badly needs it as Corporate America hustles to raise cash while the banking crisis appears to be somewhat under control and before the US debt ceiling deadline hits as soon as early June.
(Bloomberg) — A surge in stock offerings could be coming to a market that badly needs it as Corporate America hustles to raise cash while the banking crisis appears to be somewhat under control and before the US debt ceiling deadline hits as soon as early June.
“You are going to see companies rushing to issue in the public market,” said Paul Abrahimzadeh, co-head of equity capital markets in North America at Citigroup Inc. He expects to see firms seeking to raise additional capital through follow-on equity offerings or convertible bond deals.
It’s a strange situation. After a sleepy start to this year and a deathly quiet 2022, a revival in US equity capital markets activity could be triggered by two of the biggest risks facing investors. The reason is companies are eager to bring in cash while they can and avoid the uncertainty of extended fiscal gridlock in Congress.
“In the private market, people are going to try and get their deals financed and closed before the beginning of June because they don’t know what’s going to happen after the debt ceiling deadline,” Abrahimzadeh said.
When America breached the debt ceiling in 2011, equity and credit markets were frozen for roughly six months as the cost of US debt soared after the nation’s credit rating was downgraded. Indeed, the Government Accountability Office estimates that the delays in raising the debt limit raised borrowing costs by $1.3 billion that year alone.
The banking crisis could present another opportunity for corporations to raise cash. As access to debt tightens, companies may not be able to rely on credit facilities from banks because the lending standards have gone up, said Abrahimzadeh.
“We may see some benefit to equity issuance in the public and private market due to bank weakness because people need to over equitize,” he said.
The lull in ECM began early in 2022 after the Federal Reserve started to aggressively raise interest rates to get inflation under control. The average cost of equity for S&P 1500 Composite stocks topped 11% in December 2022, jumping from 8.9% in the same period of 2021, pushing issuance volume down.
While the volume of US secondary offerings this year has reached $9.7 billion, up from $8.9 billion in the same period a year ago, it’s still way below a pre-pandemic level of almost $29 billion. Meaning there’s plenty of room for the market to grow just to get back to where it was.
Citi is broadly bullish on stocks in the second half of the this year and into 2024, but Abrahimzadeh says “we’re not yet at a point where the IPO window reopened” until there’s a sustained rally and reduction in volatility.
“Once the market gets a sense that interest rates are either contained or going lower, sectors like software, FinTech, digital health, biotech, should benefit from that reduction in cost of capital,” he added.
–With assistance from Bailey Lipschultz.
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