Tuesday, September 15, 2009

The Debts of the Spenders: Secondary Offerings Hit All Time Highs

The numbers are staggering:

Secondary Offerings At All Time High

Second quarter secondary market issuance totaled at
an all time high $107.9 billion, a ten fold increase
from the previous quarter of $10.8 billion and nearly
twice the amount of the previous record, set in 2008.

Equity Underwriting

Equity underwriting increased substantially this
quarter from the prior quarter, a 777.8 percent
increase to $111.6 billion from 12.7 billion.

I'd say this is good news for companies. Many corporate finance departments have taken advantage of the unprecedented liquidity from the Federal Reserve to raise cash by undertaking secondary offerings in order to pay off existing debt obligations. After all, debt - the other word for leverage - is what got so many of them in trouble in the first place in Fall 2008.

Several things are going on here:

1) Dilution - everyone's diluted but many CFO's have chosen to undergo "Stealth dilution" by offering private buyout deals (witness the Treasury Department's equity holdings of many financial institutions). But let's move away from the finance companies. After all, they are a special case.

A popular deal is called PIPE or Public Investment in Private Equity. This is really nothing more than a stealth dilution whereby companies agree to do a large equity offering in exchange for a quiet period of trading. PIPEs remove the potential fear of insiders dumping their stock right away in a panic of lower shares.

2) Sideline Money - Ok. I realize this is a controversial topic. But the gist of it is that many fund managers believe that they are missing out on a potentially large buying opportunity - especially after the equity markets' large runup this year. On a forward looking basis, many valuations are still attractive.

Keep in mind that this is not necessarily my own opinion - I actually believe many sectors are overbought - but I do understand the bulls' argument. More importantly, it is never wise to ignore the potential of crowds moving in sync. This trend will become more apparent once we move past Thanksgiving and enter the "January Effect" whereby fund managers assess their quarterly and fiscal portfolios for next year (as well as handle tax issues related to selling and buying).

See pg. 17

Source: Data from SIFMA


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