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CFO Watch – Financing in Uncertain Times 

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CFO Watch – Financing in Uncertain Times 

Company financing needs are receiving greater scrutiny. As interest rates continue to rise, many firms have pulled forward new debt sales or even retired debt via the use of excess cash on balance sheets. Carnival Corp., the cruise-ship operator, sold $1 billion in unsecured notes in late May that was set to mature in 2030. They’ll pay investors 10.5% in annual interest and use the proceeds to pay down ancillary debt. Meanwhile, HP recently put together a bond deal to raise $2 billion and devote a large chuck for their pending $1.7 billion acquisition of another tech company, Poly. 

On the bond side, highly rated US firms raised $515.71 billion from January to June. The most active were Inc. ($12.7 billion issue), Bristol-Myers Squibb Co. ($6 billion issue), and Lowe’s Cos. ($5 billion issue). The second half of the year will likely result in lower volumes. High-yield bonds, as compared to the previously mentioned investment-grade bonds, are not as attractive (these are US companies with speculative credit ratings). Apart from notable exceptions like Ford Motor Co., Twitter, Inc., and Macy’s Inc., high-yield bond sales were down dramatically over the first six months of 2022 – $54.77 billion compared with $256.1 billion during the first half of 2021. 

A clear sign that we’re living in unique times is the absolute dearth of initial public offerings (IPOs). IPOs provided a welcome injection of financing year-on-year from 2017 to 2021. Last year was especially robust, raising close to $120 billion for countless firms. This year the IPO market is essentially closed. Leveraged loans are commercial loans provided by a group of lenders. In good times, private-equity firms, especially, accessed this low-cost funding to fund takeovers. Yet, banks are now reticent in over-exposing themselves to leveraged loans as they’ll face a tougher time selling this debt to investors.  

Revolving credit facilities, on the other end, have seen an uptick. A line of credit arranged between a bank and a business, American Eagle Outfitters Inc. made news with a five-year revolving credit facility while Ball Corp. inked a package worth $3 billion. This is a financing mechanism on the rise, registering $840.67 billion solicited during the first half of 2022 compared to $752 billion over the same period last year. 

Convertible bonds, fixed-income debt security that can be converted into equity shares or even common stock were on an absolute tear in 2021 ($1.52 trillion). This year the drop-off has been notable, except for Snap Inc. (Snapchat) having sold $1.5 billion in convertible debt. In general, higher interest rates render the associated coupon of a new convertible bond higher. This increases the cost of issuing the bond resulting in understandably less volume in the market. 

Lastly, follow-on offerings are also out of favor. Post-IPO, companies may issue additional stock in the firm with a follow-on offering. With the decline in IPOs, follow-on offerings have followed suit. It is likely some companies will raise capital to address specific rating or balance sheet considerations, but the scope will be quite narrow. 

Most of the mechanisms outlined here were the bread and butter for raising capital in years past. CEOs and CFOs at firms with high credit ratings can push out the dates when their debt will come due. But for others, creativity (or plain austerity) is the solution.