Once again, equity investors are proving just how little they know about such basic concepts as supply and demand.
The bulls are bidding up stocks because they believe the nonsense from analysts, brokers, and "strategists" that stocks are "cheap," a recession is already priced in, and the worst is over for the financial sector.
If they had any brains, they'd be thinking instead about the mad dash to raise equity capital that is already taking place, as well as the potential tsunami of supply that appears headed this way.
The following report from Bloomberg's Alexis Xydias and Michael Tsang, "Stocks 'Fire Sale' Burns Investors as Debt Costs Rise," provides some helpful insights on what we can expect to see in future.
A stock market fire sale at the cheapest prices in 13 years is burning investors as companies turn away from the highest credit costs in more than a decade.
Corporations in the U.S. and Europe must repay $1 trillion in debt maturing this year, the most since 2000, data compiled by New York-based Citigroup Inc. show. As the cost of borrowing for investment-grade companies climbed to 2.35 percentage points above government debt in the past year, firms such as Wachovia Corp., Wesfarmers Ltd. and Imperial Energy Plc are selling shares for an average 14.7 times profit, Bloomberg data show. That's the lowest since at least 1995.
"Companies won't be getting for their shares what they would have expected months ago," said Sandro Baechli, 30, a Zurich-based equity strategist at Clariden Leu, which oversees $128 billion. "Debt markets are not welcoming. Companies that desperately need the cash will have to undergo a fire sale."
The cost of borrowing for companies with credit ratings between AAA and BBB- at Standard & Poor's, which averaged 0.86 percentage point above government debt during the last five years, has since surged to the highest since at least 1997, data compiled by Merrill Lynch & Co. show. The credit-market collapse that triggered more than $260 billion in banks' losses and extinguished demand for everything from commercial paper to securitized debt precipitated the jump.
$800 Billion
Businesses have sacrificed shareholders as the cost of paying dividends decreased to a six-year low versus interest on bonds. The difference between the extra yield investors demand to buy investment-grade bonds from companies tracked by New York-based Merrill and the dividend yield of stocks in the MSCI World Index narrowed to 0.4 percentage point this month, from 1.42 points a year ago.
The MSCI World added 0.8 percent at 8:54 a.m. in London.
The last time paying dividends cost the same as bond interest was in December 2000, preceding an increase in new shares issued in the following 12 months, data compiled by Bloomberg show. The same increase now would put almost $800 billion of new equity in global markets in the next 12 months as cash-strapped companies tap investors to repay debt and fund operations.
The potential fundraising would exceed the amount companies have raised in each calendar year via share sales since at least 1999, according to Bloomberg data.
"They're raising capital from anywhere they can," said Jennifer Ellison, a principal at Bingham, Osborn & Scarborough, which manages $2 billion in San Francisco. "We're seeing a big transition in the balance sheets of these companies. It's the existing shareholders who are really paying the price."
Equity Discount
After the worst quarterly decline in the MSCI World Index since 2002, investors are less willing to risk money on corporate earnings than at any time since at least 1995, measured by the gauge's price-earnings ratio. Investors paid an average of $14.71 for every dollar of earnings generated by the 1,940 companies included in the stock benchmark last month. A year earlier, investors paid $17.09 per dollar of profit.
That may force companies to sell larger stakes to make up for financing shortfalls. Banks and brokerages, whose balance sheets have been the hardest hit by credit market losses, have raised or announced plans to seek at least $163 billion in capital since July.
Wachovia, the fourth-largest U.S. bank, said last week it will sell $8 billion common and preferred stock to its largest holders after unexpectedly losing $393 million in the first quarter as mortgage defaults increased.
Wachovia Financing
The sale of 167.7 million common shares was priced at $24, or a 12 percent discount to its closing price last week, and will increase the amount of Wachovia's outstanding equity by 8.5 percent to 2.13 billion shares, Bloomberg data show. The sale is the first by Wachovia this decade, according to Bloomberg data.
In return for the $4 billion Wachovia will raise selling common shares, the Charlotte, North Carolina-based bank will distribute about $252 million in dividends annually. That represents a yield of 6.25 percent. Wachovia will also pay $302 million in dividends on the convertible preferred shares that will carry an annual interest rate of 7.5 percent.
The lender last week slashed its quarterly dividend by 41 percent to save cash, three months after affirming its ability to pay it. The reduction cost existing shareholders about $2.08 billion a year in payouts. Shareholders have lost an additional $48 billion owning Wachovia shares over the past year.
The stock fell 2.1 percent last week, bringing its decline since last April to 51 percent.
Wesfarmers
Wesfarmers, Australia's second-largest retailer, will ask shareholders to buy A$2.5 billion ($2.3 billion) of stock after the costs to refinance debt from the purchase of Coles Group Ltd. surged by more than a fifth.
Investors can buy one new share at A$29 for every eight they own, a 22 percent discount to the last traded price, Wesfarmers said in a statement today. It has until October to refinance A$4 billion of debt from November's A$18.2 billion acquisition of Coles.
The Perth-based company turned to shareholders after being forced to pay more than 11 percent interest on $650 million worth of bonds sold in the U.S. this month. The sale will increase the number of outstanding shares by about 15 percent.
"The Wesfarmers board believes that an equity issue is in the best interests of shareholders, given a backdrop of ongoing volatility in global debt-capital markets," Chief Executive Officer Richard Goyder said. "The equity raising will strengthen the Wesfarmers balance sheet and provide us with financial flexibility going forward."
'Inconsistent and Incompatible'
Imperial Energy, the London-based oil company working in western Siberia, tumbled 29 percent on April 2 after saying it may sell new stock to its shareholders to pay debt and fund exploration. The decline was the largest since the company went public in 2004 as investors prepared for a doubling in the company's 51.1 million outstanding shares.
Two weeks later, Imperial set the price of its 306.7 million pound ($608.5 million) offering at 600 pence a share, a 42 percent discount to the previous day's close. Had the company sold at last week's closing price of 1,000 pence, it would have only needed to offer 30.67 million shares.
"We are disappointed that the current state of the debt markets has prevented us from funding our development program as we had planned," Chairman Peter Levine said in a statement when the stock sale was announced.
John Hamilton, finance director at Imperial Energy, said in an interview last week that the company chose to sell stock when credit markets proved unattractive.
"The terms and conditions to borrow money were inconsistent and incompatible with our strategy," he said.
I would venture to say your 1 trillion usd number is more like 3 trillion usd based on paper that has not been rolled prior to currently maturing debt and the explosion in term financing from the ECB and the FED
Posted by: 2b | April 23, 2008 at 11:56 AM