Battling excessive inflation, rising rates of interest and financial uncertainty, firms raised much less capital within the markets through the first half of the yr in contrast with the primary six months of 2021, when inflation wasn’t as excessive and lots of companies tapped low-cost funding to switch higher-priced debt.
The Federal Reserve, trying to curb persistent inflation, this yr has raised rates of interest 3 times, most not too long ago in June when it elevated its benchmark price by 0.75 proportion level, the largest such transfer since 1994. Stocks and different belongings have dropped sharply in current months, making fairness raises and preliminary public choices much less interesting.
With the U.S. central financial institution signaling extra will increase, executives are taking a detailed have a look at their firms’ financing wants. Many companies, particularly these with excessive credit score rankings, have already pushed out the dates when their debt will come due, making opportunistic financings much less seemingly within the second half of 2022, bankers mentioned.
“Companies are trying to make sure that their financing strategy continues to match up with their corporate strategy,” mentioned
Will Alston,
head of company banking at
Wells Fargo
& Co.
Here’s a more in-depth have a look at how several types of offers carried out within the first six months of the yr. The knowledge, supplied by Refinitiv, seems at underwritten transactions by U.S. private and non-private firms.
Investment-Grade Bonds
Highly rated U.S. firms raised $515.71 billion by way of bond gross sales within the first six months of the yr, barely down from $603.34 billion within the prior-year interval, based on Refinitiv. Among the companies that tapped the investment-grade bond markets had been e-commerce large
Amazon.com Inc.
with a $12.7 billion problem, healthcare agency
Bristol-Myers Squibb Co.
with practically $6 billion raised and home-improvement retailer
Lowe’s
Cos., which offered about $5 billion to buyers.
Bankers anticipate decrease volumes within the second half of the yr. “With the increase in financing costs, the economics around prefinancings have become less attractive,” mentioned
Dan Mead,
head of the investment-grade syndicate at
Bank of America Corp.
“Issuers have built up pretty large cash positions in the past two years, and some of them are now looking to use some of that cash to pay down debt instead of refinancing,” Mr. Mead mentioned.
High-Yield Bonds
Bond gross sales of U.S. firms with speculative credit score rankings declined sharply within the first six months of the yr, to $54.77 billion, in contrast with $256.1 billion within the prior-year interval, Refinitiv mentioned. “As you move down the credit quality spectrum, the ability to issue is not as robust,” mentioned Wells Fargo’s Mr. Alston. Among the businesses that offered high-yield bonds this yr had been auto maker
Ford Motor Co.
, social-media platform
Twitter Inc.
and retail retailer operator
Macy’s Inc.,
Refinitiv mentioned.
Leveraged Loans
After having fun with low-cost funding for years, private-equity corporations are discovering it tougher to safe funding within the leveraged-loan market, the supply of a lot of the capital they use to fund takeovers. Leveraged loans are a sort of syndicated mortgage for below-investment-grade-rated firms.
Banks in current months have diminished their publicity to leveraged loans for fears they won’t be capable to promote this debt on to buyers. “Banks are hesitant to commit new capital,” mentioned
Michael Moore,
a managing director with funding financial institution Union Square Advisors LLC. “It’s incredibly hard to assess how much cushion is needed in this market for a new debt commitment,” Mr. Moore mentioned.
Buyers and sellers additionally wrestle to agree on valuations, mentioned
Vivek Bantwal,
who co-heads the worldwide financing group at
Goldman Sachs Group Inc.,
referring to offers within the leveraged finance area. “New deals have slowed down, and once the current slate of deals comes to market, the supply and market backlog will be pretty low,” Mr. Bantwal mentioned.
Revolving Credit Facilities
U.S. firms agreed to the next quantity of capital by way of revolving credit score services within the first six months of the yr, based on Refintiv. They took out $840.67 billion in revolvers, up from about $752 billion within the prior-year interval. Recent transactions embody a brand new, five-year revolving credit score facility by attire retailer
American Eagle Outfitters Inc.
and a $3.1 billion deal by packaging supplier
Ball Corp.
Convertible Bonds
Companies within the first two quarters raised considerably much less capital by promoting convertible bonds, which may flip into fairness. Both the quantity and quantity of offers declined within the first six months of the yr, with companies amassing about $8.5 billion from buyers, in contrast with $52.47 billion within the prior-year interval, Refinitiv mentioned. Among the businesses that offered convertible debt in 2022 was
Snapchat
proprietor Snap Inc., with a $1.5 billion transaction.
“Higher levels of interest rates make the associated coupon of a new convertible bond higher, thereby increasing the interest rate expense or cost to the issuing entity,” mentioned
Howard Needle,
a portfolio supervisor at funding advisory agency Wellesley Asset Management Inc. Many convertible bonds have dropped in worth amid the current market decline, Mr. Needle mentioned.
Initial Public Offerings
Heightened market volatility has resulted in a pointy fall in firms trying to record through an preliminary public providing, leading to an IPO market that’s mainly closed, bankers mentioned. “Most of the IPO-calendar is geared towards the fourth quarter of this year or even towards next year,” mentioned
Jeff Bunzel,
world co-head of
Deutsche Bank AG’s
fairness capital markets enterprise. “A lot of companies will just move their plans next year with the belief that markets and valuation expectations will be normalized by then.”
For the market to thaw, main inventory indexes might want to cease swinging wildly as buyers consider surging inflation, interest-rate hikes and an unsure financial outlook. “What we really need is to see some large, well-known issuers come to market at a price so that they trade positively afterwards,” mentioned
Josh Weismer,
head of the equity-capital-markets enterprise at Mizuho Americas.
SPACs
The variety of special-purpose acquisition firms, which record as shells on the general public markets to boost funds for taking on one other firm, surged in 2021. Volumes since then have come down, with many SPACs which have gone public nonetheless looking for appropriate acquisition targets, bankers mentioned.
Follow-On Offerings
Market volatility is making it much less enticing for firms which have gone public already to promote new fairness to buyers. The quantity of proceeds raised by way of such follow-on choices declined to $21.4 billion within the first six months of the yr, down from about $110 billion within the prior-year interval, Refinitiv mentioned.
“In late 2020 and most of 2021, you had a lot of companies raising capital because they could, often without a defined use of proceeds,” Mr. Weismer mentioned. Among the companies that not too long ago entered the follow-on market was
American Tower Corp.
, a real-estate funding belief that raised about $2 billion.
Volumes are unlikely going to select up rapidly, bankers mentioned. “The only thing that is going to be financed is when people need to finance,” Deutsche Bank’s Mr. Bunzel mentioned, pointing to mergers and acquisitions, for which firms may require an fairness element. “You might also see some companies raising capital in order to address balance sheet and potential rating considerations,” he mentioned.
Write to Nina Trentmann at [email protected]
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