Discussion Post

This week we are looking at the cost of capital and raising capital for corporations.

In the US News article from December 28, 2023, a quick review of the 2023 IPO market is presented, along with thoughts for 2024. High inflation and market “earnings recession” negatively impacted the market for IPOs in 2023, but 2024 may see a return to more “normal” activity levels. A second article from Bloomberg highlights 2023 as a year of high investor losses in SPACs, or “blank check companies”. These are special purpose acquisition companies or SPACS. There are a number of YouTube videos out there that will help explain SPACs, but I found this really short (<4 minute) video that gives a good overview

The third article for this week is from Reuters.com, which discusses the recent corporate bond issues and their outlook for early 2024.

In the lecture notes I focus on capital either from a firm going public for the first time (IPO) or selling more additional stock (secondary offering) or through debt offerings (selling bonds or taking out large loans). In the case of start-up firms, capital sources also include bank loans and from venture capital firms. VCs, or private equity firms are a major source of financing for non-public firms.

For this discussion, I’d like you to research a firm of your choice that has recently (last 2 years) raised major capital from public sources. This can be an IPO, SPAC, venture capital funding, or major issuance of new debt.

Companies Grew More Confident About Initial
Public Offerings in 2023, Raising Recovery Hopes
The IPO market limped ahead in 2023 and analysts expect a steadier recovery ahead
By Associated Press
|
Dec. 28, 2023, at 11:58 a.m.
NEW YORK (AP) — The signs of life shown by the IPO market, especially in the second half
of the year, are giving analysts hope that more companies will be enticed to go public in
2024.
Overall, 108 initial public offerings raised proceeds of about $19.4 billion in 2023,
according to Renaissance Capital. That’s up from a dismal 71 IPOs for proceeds of $7.7
billion in 2022, when high inflation and rising interest rates discouraged companies from
hitting the market.
This year’s big IPOs included healthcare products company Kenvue in May, U.K. chip
designer Arm Holdings in September and footwear company Birkenstock in October. They
accounted for over half of the total IPO proceeds, according to Renaissance Capital.
Instacart also had a splashy IPO in late summer.
A post-pandemic surge for IPOs was stifled by the highest inflation in four decades in 2022,
raising concerns about the economy buckling under the pressure. The Federal Reserve then
embarked on a historic round of rate hikes to tame inflation, which made borrowing more
expensive and increased caution in the IPO market.
The Fed’s preferred measure of inflation, the monthly personal consumption and
expenditures report, has cooled to a pace of 2.6% from a high of 7.1% in the middle of
2022. Other measures of inflation, such as the consumer price index, reached a peak of
9.1% in 2022.
The central bank fought inflation by raising its benchmark rate from near zero to a range of
5.25% to 5.50%. The Fed has held that range steady for several months and has signaled
that it could start cutting rates in 2024. Wall Street is betting that could happen early in the
year.
Cooling inflation and falling interest rates could push the IPO market back toward a more
normal level of activity, which averaged about 170 IPOs with average proceeds of about
$43 billion from 2017 to 2019.
“While the IPO market’s recovery is still somewhat tenuous, all signs point to a solid pickup
in 2024,” said Renaissance Capital in its recent IPO review for 2023.
The IPO market is expected to grow along with an economy. Corporate profits are expected
to rise after shaking off an earnings recession. Earnings gains of just under 2% during the
fourth quarter of 2023 could be followed by a gain of more than 8% in the first quarter of
2024 and 10% during the second quarter of 2024 for companies in the S&P 500, analysts
forecast.
The S&P 500 index is on track to close the year with a gain of more than 20%.
Wall Street is increasingly expecting the Fed to achieve its so-called “soft landing” goal by
trimming inflation to the central bank’s 2% target without an ensuing recession.
IPO activity could speed up as CEOs gain more confidence that the “soft landing” will
happen, according to a Goldman Sachs analysis.
Copyright 2023 The Associated Press. All rights reserved. This material may not be
published, broadcast, rewritten or redistributed.
https://www.usnews.com/news/business/articles/2023-12-28/companies-grew-more-confident-aboutinitial-public-offerings-in-2023-raising-recovery-hopes
Bloomberg.com news articles: Markets
SPAC Mania’s Ugly End Yields $46 Billion of Investor Losses
By Jonathan Randles and Amelia Pollard
December 27, 2023 at 5:00 AM CST
Wall Street’s affair with blank-check firms, the finance fad that pushed companies
onto the stock market during the Covid-19 pandemic, ended this year with a string of
big bankruptcies and even bigger losses for shareholders.
At least 21 firms that went public by merging with special purpose acquisition
companies, or SPACs, went bankrupt this year, according to data compiled by
Bloomberg. Measured from their peak market capitalizations, the insolvencies
bookend the loss of more than $46 billion of total equity value.
The failures span money-losing electric vehicle startups and forward-thinking
farming companies. Blank-check firms were good at propelling their targets to the
public market even when they lacked well-formed financials, said Gary Broadbent,
an executive guiding former SPAC AppHarvest Inc. through its liquidation. Many
weren’t “ready for primetime,” he said.
Some were more promising than others, but all drew dollars from excitable investors
caught up in the SPAC craze, including mom—and-pop traders. Plenty of
shareholders are now suing SPAC sponsors over their losses.
The largest SPAC bankruptcies included that of flexible workplace provider WeWork
Inc., which boasted a $9.4 billion market value after going public in 2021. It
succumbed to Chapter 11 last month with plans to jettison expensive office leases.
Electric vehicle makers Proterra Inc. and Lordstown Motors Corp. also carried
sizable market values, topping out at roughly $3.7 billion and $5 billion, respectively,
before filing for bankruptcy earlier this year.
Many of these companies sought protection from creditors less than two years after
going public. Software firm Near Intelligence Inc. filed Chapter 11 in December, less
than 9 months after its stock debuted on the Nasdaq.
Of course, many predicted the ongoing wave of bankruptcies. Critics called the
SPAC frenzy a bubble soon after it began.
Going public via SPAC has historically been faster and faced less scrutiny than
traditional initial public offerings. During the boom, companies targeted by blankcheck firms also often made more optimistic projections about the trajectory of their
businesses than would be seen in old-fashioned IPO processes.
SPAC Bankruptcies Keep Piling Up
More than $46 billion of SPAC equity laid to rest by bankruptcies this year
Source: Bloomberg
Note: Table assumes shares will receive no recovery in bankruptcy
Plus, arrangers had incentives to complete less-than-pristine mergers. Early
investors could redeem SPAC shares at $10 if they didn’t like the deal, for one.
Excitement over meme stocks and the promise of high valuations encouraged
private companies to complete blank-check mergers at a rapid pace, said Usha
Rodrigues, a law professor at the University of Georgia who has studied SPACs.
The result was a glut of SPACs which Rodrigues described as “a ticking time bomb”
of corporate failures that materialized in 2023. “Everyone should have seen this cliff
coming,” Rodrigues said.
More Trouble
More trouble is likely on the way as higher interest rates weigh on company balance
sheets. About 140 other former SPACs will likely need more financing in the next
year in order to keep operating, according to data compiled by Bloomberg in midDecember that estimates a company’s cash needs.
SPAC companies were also more likely than their corporate peers to raise doubts
about their future, according to Hudson Labs, an investment research software firm
that analyzes regulatory filings. Nearly 44% of SPAC companies that filed annual
reports in 2023 have reported going-concern warnings compared to roughly 22% of
non-SPAC companies, Hudson Labs said.
Some shareholders are hoping lawsuits can help recover their losses. Lordstown
stockholders accused sponsors behind its SPAC of overstating demand for its
flagship Endurance truck. As Lordstown was preparing to go public in 2020, the
company touted a backlog of 38,000 vehicle pre-orders. But unlike Tesla Inc. and
other competitors, Lordstown didn’t require a deposit and shareholders claim
company officials were aware those lofty Endurance pre-orders were unlikely to net
actual sales.
Lordstown’s stock fell after short-seller Hindenburg Research accused the company
of overstating demand for the Endurance. Lordstown never sold close to the number
of Endurance trucks it had once projected. After the company filed Chapter 11 in
June, its chief financial officer testified the company sold less than 40 vehicles.
Lordstown officials and its SPAC sponsor have denied wrongdoing. The vehicle
maker’s proxy statement disclosed that Endurance pre-orders weren’t binding and
didn’t require deposits, the company said. Lordstown stockholders were provided
enough information to decide for themselves if the stock was worth the risk, they
said.
Federal regulators have been slow to respond to the SPAC craze, even as Gary
Gensler, chairman of the Securities and Exchange Commission, has been a vocal
critic of the maneuver. In March 2022, the SEC proposed new rules that would
require additional disclosures about sponsors and bolster investor protections.
Shortly after, Wall Street giants started to distance themselves from deals involving
blank-check companies and the SPAC pipeline dried up.
But the failures keep coming. Just last week, Bird Global Inc. — the company whose
electric scooters once blanketed major cities’ sidewalks — filed for Chapter 11
protection. Once the holder of a $2.5 billion market value, the firm revealed in court
papers it had $3.3 million of cash when it entered court protection.
— With assistance from Bailey Lipschultz
Reuters.com Markets online article
Top-rated US companies raise over $29 billion in newyear bond supply rush
By Shankar Ramakrishnan and Davide Barbuscia
January 2, 2024 4:08 PM CST Updated a day ago
Jan 2 (Reuters) – Top-rated U.S. companies raised over $29 billion in debt on
Tuesday, giving the corporate bond market a strong start to the new year, as the
companies tapped demand from investors anticipating lower interest rates later
this year.
Local names like Toyota Motor Credit, Ford Motor Credit along with European
banks UBS BNP Paribas and Lloyds Banking Group were among a slate of 16
companies that issued new bonds on Tuesday.
The firms were looking to take advantage of low Treasury yields and tightening
credit spreads, or the premium companies pay over a Treasury benchmark, to
mostly refinance a large maturity wall this year and next. Roughly $780 billion of
bonds mature in 2024 and $1 trillion of them come due in 2025, according to a
Citi research note.
Bond syndicate desks were expecting an average of nearly $63 billion of
investment-grade bonds the first week of the year, above the $50 billion average
for that period over the past five years, according to Informa Global Markets. Last
year 37 borrowers raised $58 billion in the first week of the year.
Demand was expected to be high as investors aim to lock in yields that may not
be available if the Federal Reserve starts to cut U.S. interest rates later this year.
“Strong seasonal performance during January is likely further strengthened this
year by expectations for falling yields over the course of the year that will likely
result in outsized demand in the early part of the year,” said BMO Capital
Markets’ credit strategist Dan Krieter in a note.
Gross issuance in 2024 is expected to reach $1.3 trillion in 2024 compared with
$1.2 trillion in 2023, but net new issuance after maturities, calls, tenders and
bond repurchases is expected at only $475 billion, lower than last year’s amount
of nearly $500 billion, said the Citi note.
The supply rush on Tuesday and expectations of a busy January helped push U.S.
Treasury yields, which move inversely to prices, higher.
Benchmark 10-year yields were at 3.944%, some 8 basis points higher than last
week. The move, which follows a sharp rally over the past couple of months, was
partly the result of investors preparing to absorb new corporate debt issuance,
analysts said.
“Partly it’s a correction and partly it’s the market setting up first for supply,” said
Gennadiy Goldberg, head of U.S. Rates Strategy at TD Securities USA. “It typically
happens early in the year, with rates selling off.”
Reporting by Shankar Ramakrishnan and Davide Barbuscia in New York Editing by Matthew Lewis