More companies are selling shares to help cut debt

WHEN Metals Acquisition bought a copper mine in Australia from Glencore for almost US$900 million upfront in 2023, it turned to the debt markets to help fund the purchase.

With borrowing costs now much higher after the end of the easy money era, management decided this year that an equity raise was a palatable option to cut leverage. Already listed in New York, demand from Australian investors was so high that the company decided to sell shares there, eventually raising about A$325 million (S$292 million).

“The equity markets were screaming out for a copper name” after the price of the metal rose, chief financial officer Morne Engelbrecht said. “I took those high interest-bearing liabilities out, and we have still got that opportunity” to raise more equity “open to us going forward, depending on how the share price performs”.

It’s not just listed companies such as Metals Acquisition that are turning to the stock market to reduce their burdens after tightening monetary policy made equity raises more attractive. More firms going public are also citing reduced leverage as a motivation.  Corporates completed US$28.5 billion of initial public offerings (IPOs) in the year to April where debt repayment was cited among the use of proceeds, data compiled by Bloomberg show. That’s an increase of 56 per cent on the prior 12 months.  

“Higher borrowing costs are starting to bite,” said Evgenia Molotova, a senior investment manager at Pictet Asset Management. “With a high level of uncertainty on interest rates,” it makes sense “to tap the IPO market as that’s opening up, even though the valuations are nowhere near the 0 per cent interest rate super-charged era of Covid”.

Soaring stocks

The strength of stock markets means raising equity to take out leverage is not a bad thing at the moment, said George Maris, chief investment officer of global equities at Principal Asset Management. The S&P 500 index has soared about 28 per cent in the past year and Europe’s Stoxx 600 is up more than 12 per cent in the same period.

While debt-driven IPOs are a growing trend, bankers expected even more listed companies to pursue equity placements. However, so far cheap borrowings agreed during the pandemic limited the need for listed companies to use public markets. They raised almost US$20 billion by selling shares in the four months to April, an increase of just 4.5 per cent on the same period last year.

“We frankly have not seen the level of issuance we might have expected to see,” said Tom Snowball, head of the UK equity capital markets business at BNP Paribas. “Are companies going to need to turn to equity if rate cuts keep being pushed out? That remains to be seen.”

Quality companies that do come to the market will find willing investors, some of whom are frustrated by the lack of options to put their money to work. In Europe, a lack of primary market activity and rising buybacks means the share count is shrinking at the fastest pace in 20 years, according to Barclays.

“Companies can’t expect us to pay up for their ability to lower interest rates via public listing but, that said, not all debt is the same,” said Luc Mouzon, head of equity capital markets at Amundi Asset Management. “We prefer IPO candidates that have growth or M&A-related debt on their balance sheets than those that are so levered that their free cash flows are eaten up by the service of the debt.”

Investors are being discerning around deals because they do not want to fund a straight recapitalisation of a company through an IPO and will demand price discounts for those that try, asset managers say.

Private equity

That’s a potential headache for private equity firms, which loaded companies up with cheap debt when borrowing costs were low. In some cases, they added even more leverage to the businesses last year in the expectation that valuations would receive a boost from a slew of rate cuts that have yet to materialise.

“With rates staying higher for longer, the reckoning is coming in terms of debt payments,” said Nicole Kornitzer, a portfolio manager at Kornitzer Capital Management. “Private equity needs their money back, so they’ll have to consider IPOs.”

Back at Metals Acquisition, Engelbrecht paid some interest-bearing liabilities using proceeds from the Australian listing. He is now examining options for the company’s mezzanine debt, including rolling it into a senior facility. The firm has no plans to raise more from share sales at the moment.

“We were quite a highly leveraged company,” said Engelbrecht. “Now you have got an asset that’s generating a lot of cash flow, and so we can get a lot of equity into the business, pay off some of that debt and create further value for our shareholders.”

M&A moves

Brokerage firm La Rosa Holdings, meanwhile, used its IPO in October to pay off most of its borrowings, clearing the way for it to do deals.

Listing allowed them “to go out there and to be very aggressive on the M&A side and that’s why we have had 10 acquisitions since the IPO”, chief executive officer Joe La Rosa said. “As a private company, we would be very much challenged to be able to get some of this financing.”

Home appliance manufacturer Whirlpool could consider raising money via the equity markets if it was to do a significant acquisition, though M&A is a low priority for now, chief financial officer Jim Peters said. The company sold part of its stake in its Indian unit earlier this year, in part because its valuation made it an attractive part of the group’s strategy to cut debt, he said. The company does not intend to reduce its 51 per cent stake further, he added.

One advantage of reducing debt through share sales is that it can improve a company’s earnings-per-share performance, said Thomas Martin, a senior portfolio manager at Globalt Investments, which manages about US$3 billion.

“Companies that were waiting for rates to go back down to be able to refinance their debt that way – that isn’t going to happen for a long time,” he said. “They don’t really have any choice but to fix that risk on their balance sheet by raising equity. And while the market’s strong, it’s a good time to do it.” BLOOMBERG

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