2009 Equity Offerings: Creating Liquidity

Earlier in the decade, buying back shares was all the rage. I posted in 2007 my perspective. If the company has the cash, believes its stock is cheap, a small buy-back to cover options and other corporate issuance is prudent to not dilute shareholders. But, the bulk of retained earnings should be returned to shareholders as dividends and even more important, invested back in the business. If management believes it cannot invest in the business, they have serious problems. The point was that many firms were issuing debt to buy back shares. Financial engineering was in play to buy shares on the cheap with historically low interest rates and allow cash flow to pay the vig. Shareholders supposedly gained because there are fewer shares outstanding. We all know how this ended: frozen credit markets, no equity offerings, and plummeting stock prices.

As the seasons changed so did the mindset of management. Add to that government intervention and the risk appetite of institutions. The market for equity offerings exploded in the second quarter of 2009, with over $100 billion brought to market; and the key - sold. Although only 2% of the equity offerings were IPOs, the dollar value of IPOs Q2 was double that of Q1 and no surprise, the highest level seen since Q2 2008. The global equity rally from the low in early March, coupled with improving confidence in the economy, provided the opportunity for significant capital raising via primary and secondary offerings.

Historically, low interest rates like we have now have spurred debt offerings rather than equity offerings from firms that are in need of capital. There have been plenty of refis in the corporate world.

There are a number of factors that have led to such a high level of equity offerings in 2009. The first and primary reason firms issued stock is “because they can”. After the run up in stocks from the March low, the appetite for risk has improved. There were trillions of dollars and in foreign currency sitting on the side lines seeking a return. This also helped create a market and a huge amount of liquidity for equity offerings. The fixed income markets have not thawed as quickly as the equity market, causing the stock market to be more attractive on a relative basis.

The government forced many financial institutions to add to their balance sheets and stock offerings were announced weekly by the industry. While large banks make up the majority of equity offerings in Q209, companies of all sizes from all sectors have participated.

Many firms announced secondary offerings along with earnings results that beat expectations. The result from many of these firms has been an initial price drop on the news of dilution followed by a continued run up in stock price (read: BB & T Corp. (BBT), Bunge Ltd. (BG), Petrohawk Energy (HK), Sterlite Industries India (SLT), JPMorgan Chase (JPM), Anadarko Petroleum (APC). In the wake of the last year, firms may be looking for a source of permanent capital. Capital to gain market share, make acquisitions while many companies are struggling, and introduce new products and enter new markets. That takes vision and a strong measure of risk/reward scenarios.

In the second quarter, financial firms made up 74.48% of the offerings, followed by Energy 5.86%, and Materials 4.14%. The largest 10 offerings of Q2 total approximately $45 billion:

Ticker	Name	Announcement	Effective	Offering Type	Value ($Mlns)
BAC	Bank of America Corp	5/8/2009	5/19/2009	ADDL	13,463
WFC	Wells Fargo & Co	5/7/2009	5/8/2009	ADDL	7,502
JPM	JPMorgan Chase & Co	6/1/2009	6/2/2009	ADDL	5,006
GS	Goldman Sachs Group Inc	4/13/2009	4/14/2009	ADDL	5,000
MS	Morgan Stanley	5/7/2009	5/8/2009	ADDL	4,041
USB	US Bancorp	5/11/2009	5/11/2009	ADDL	2,502
MS	Morgan Stanley	6/2/2009	6/2/2009	ADDL	2,247
STT	State Street Corp	5/18/2009	5/18/2009	ADDL	2,000
DOW	Dow Chemical Co/The	5/5/2009	5/6/2009	ADDL	1,957
RF	Regions Financial Corp	5/20/2009	5/20/2009	ADDL	1,600

*data from Bloomberg

Although Dow Chemical is the only non- financial in the top 10, American Electric Power Co (AEP), Ford Motor (F), and Express Scripts (ESRX) are not far behind and completed large equity offerings in Q2 as well. Thus far in 2009, approximately 39% of the companies that have issued equity offerings have been financials, and while this is up from previous years, the following chart indicates that other sectors such as energy, industrials, and healthcare are also participating.

Sector as a % of total # equity offerings	2006	2007	2008	2009
Consumer Discretionary	11.01%	7.79%	7.46%	5.78%
Consumer Staples	1.36%	1.98%	1.29%	2.41%
Energy	12.22%	13.60%	15.17%	16.14%
Financials	25.94%	20.40%	31.88%	39.28%
Health Care	17.04%	17.71%	14.65%	11.33%
Industrials	11.61%	13.46%	11.05%	9.64%
Information Technology	11.61%	17.14%	7.71%	6.27%
Materials	3.17%	3.68%	5.14%	5.06%
Telecommunication Services	2.56%	1.98%	0.51%	0.24%
Utilities	3.47%	2.27%	5.14%	3.86%
Total	100.00%	100.00%	100.00%	100.00%

*data from Bloomberg

It is the hope of this country as well as business executives that the equity markets allow firms to raise money, provide fair valuations and create liquidity for everyone. It is the job of investors to seek out the firms that have balanced the risk/reward spectrum and are growing their companies, gaining market share, introducing products or making strategic acquisitions in 2009, and positioning themselves for 2010 and beyond.

Shout out: research for this post was also performed by Beacon Analyst Emily Needell, who recently passed level II of the CFA tests – go Emily!

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is long BB & T Corp., Bunge Ltd., Petrohawk Energy, Sterlite Industries India, JPMorgan Chase and Anadarko Petroleum.