Raising Capital: How Companies’ Financing Strategies Are Changing In Volatile Markets

Market Context and Macroeconomic Shift:

• 2021 saw record equity issuance and strong debt markets driven by monetary stimulus and low interest rates.
• Markets are pricing in six to seven Federal Reserve rate hikes for 2022, shifting from an era of accommodation to tightening conditions.
• Early 2022 volatility was triggered by Fed rhetoric changes in January and expectations of a rate hike in March.
• Geopolitical instability, specifically the Russia-Ukraine conflict, has introduced significant uncertainty and is expected to drive future market volatility alongside rate expectations.

Access to Capital and Market Performance:

• Debt Markets: Remain robust; January recorded the largest Leveraged Buyout (LBO) issuance since October 2007 at $30 billion.
• Investor Preferences: There is heightened demand for floating-rate instruments compared to fixed-rate debt due to the rising rate environment.
• Equity Markets: Face challenges due to volatility; rapid valuation changes make IPO execution difficult, causing companies to delay public listings.
• Credit Spreads: Investment grade spreads have widened ~50 basis points year-to-date, and high yield spreads ~150 basis points, though both remain below 10-year averages.
• Leverage: Deals remain conservative, with leverage generally staying below seven times.

Corporate Strategy and Capital Allocation:

• Share Buybacks: Announced buybacks reached $230 billion year-to-date, up from $218 billion at the same time last year.
• Financing Buybacks: Companies are issuing debt (e.g., Twitter's $1 billion bond at 5% coupon) specifically to fund accelerated share purchases and signal undervaluation.
• Spinoffs: A "shrink to grow" strategy is gaining traction, allowing management to focus on independent business lines and optimize capital structures.
• M&A: Pipeline remains robust; companies are targeting undervalued assets for strategic acquisitions.
• Private Markets: Increased activity in SPACs, PIPEs (Private Investments in Public Equities), and non-registered transactions as alternatives to public equity.

SPAC Specifics and Trends:

• SPAC activity has significantly cooled; the 500+ deals and $600 billion raised in 2021 were considered historical anomalies.
• Redemptions: Investor redemption rates in SPAC mergers have risen from ~40% in 2021 to ~80% in 2022, reducing capital certainty.
• Performance Pressure: Many SPAC-merged companies trade below IPO prices due to failure to meet growth projections.
• Sector Shift: Focus has moved away from unprofitable tech growth stories toward profitability and cash flow, particularly in non-tech sectors.
• Outlook: 600 remaining SPACs are seeking partners, but the bar for deals is higher given the redemption rates.

Fixed Income and Issuance Trends:

• Loan vs. Bond Mix: A 75/25 split in favor of loans ($97 billion) over high-yield bonds ($36 billion), an anomalous shift reflecting the floating-rate preference.
• Duration Strategy: Financial institutions issued shorter-duration debt (average ~5 years) early in the year to manage rate risk.
• Corporate Duration: Large corporates (e.g., AT&T) are lengthening duration to lock in rates and ensure interest coverage certainty.
• Underwriting: Investors are becoming more selective, conducting deeper diligence compared to the 2020-2021 cash-saturated environment.

ESG and Digital Innovation:

• ESG Execution: Corporate focus is shifting from commitments to delivery, utilizing divestitures, structured finance for green projects, and carbon offsets.
• Standardization: Regulatory pressure from the EU, UK, and US Treasury is driving demand for better transparency and standardization in ESG metrics.
• Digital Assets: Innovation is pivoting from price speculation to infrastructure, including asset tokenization (securities and hard assets) and DeFi for faster settlements.
• Digitization: Proof-of-concept digital bond issuances (e.g., EIB) suggest a trend toward on-chain issuance for traditional markets.

2022 Outlook:

• Stance: Volatility is viewed as creating opportunity; companies will remain defensive regarding balance sheets but active in strategic growth.
• Geopolitics: Future M&A and capital allocation may shift toward regionalization or localization depending on global trade dynamics.
• Resilience: Corporates entered the year with strong balance sheets due to heavy refinancing in 2020-2021, positioning them to withstand rising rates.