The Easy Money Has Already Been Raised

(Bloomberg Opinion) -- The public capital markets are having a moment. A handful of big initial public offerings in the U.S. and Europe have launched successfully in the last week. Billions of dollars of fresh equity have been raised over the last two months. In the U.K., companies have taken advantage of a liberalized regime for tapping investors. But asset managers don't possess infinite cash and the corporate fundraisings have barely begun. At some point, there must be a reckoning.

The IPOs of coffee-capsule maker JDE Peet's BV, Warner Music Group Corp. and business-intelligence platform ZoomInfo Technologies Inc. are less encouraging than first appears.

Much of the legwork on JDE Peet's was done before the crisis hit. Its at-home beverage business possessed clear resilience to the impact of the pandemic. The deal rested on some supportive anchor investors and was priced at an alluring discount to Nespresso-owner Nestle SA. That is not to diminish the achievement of getting the listing done, but only a minority of firms will share such favorable characteristics.

Likewise, Warner Music, which priced at the upper end of its marketing range, was in the works before the crisis. Digital music is evidently resilient to lockdowns. ZoomInfo's near doubling on debut is so extreme it begs the questions of whether it was mispriced or whether the elevated price will stick.

These successes unfortunately do not prove the IPO market is open to all comers.

Now consider how already-listed companies are raising money to cut debt, especially now that equity markets are up a lot since their March nadir. Quick-fire placings like Compass Group Plc's $2.5 billion share sale remain the preferred route over time-consuming rights offers. The implication is that companies can't get, or don't trust, investment banks to backstop rights offers that won't close for a few months.

Where rights offers are underway, the terms are onerous. That's the case with Bang & Olufsen A/S, the Danish high-end hi-fi company whose chairman sadly passed away this week. It's selling new stock at nearly 60% below the company's implied share price, adjusted for the enlarged share count. That is a sizable discount given the shares had already dropped around 45% since January. Despite that, fees and expenses will absorb some 13% of the gross proceeds.

Look also at SIG Plc's recent fundraising. The building materials group is seeking 150 million pounds ($189 million) — equivalent to almost its entire market capitalization. It has lined up buyout firm Clayton, Dubilier & Rice LLC to provide up to 85 million pounds of the total, for a stake of roughly 25%. SIG clearly wanted to be 100% sure of getting most of the money. But certainty meant going beyond the usual stock-market investors.

In the financial crisis, the banking sector had to be bailed out. Today, the impact of the pandemic goes beyond one industry. Thousands of companies will be looking to cut their leverage. The demands on asset managers to write checks in support of that transition will continue. With dividend income cut, investors could be under more pressure to sell existing holdings to fund these cash calls. If that assessment is right, the money will run out at some point. The equity market may look generous right now. Overstretched corporates shouldn't take it for granted.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.