Should CFOs hope for a GameStop lottery ticket?
The extraordinary price action in GameStop, AMC Entertainment and others' shares last week is surely leading nervous CFOs all over the world to get an at-the-money rights issue signed off, in case they win the attention of Reddit's WallStreetBets crowd and can raise equity at giddy multiples. But this is like hoping for a winning lottery ticket. For firms in the most Covid-addled sectors, a private approach will be their best shot at financing a turnaround.
Whether it was a financial French revolution, a revolt against the suits, a particularly sweary short squeeze or the madness of crowds, the explosion of the WallStreetBets crowd into GameStop last week had the finance world occupied trying to explain short selling to their non-finance friends and family — a sure sign that a financial event has gone big time.
It also raised the profile of an unusual capital markets instrument: the at-the-money rights issue. For understandable reasons, companies don’t usually want to spook their existing investors with the threat of dilution. When they want to raise capital that way, that usually — rightly — means explaining in some detail why it’s needed and asking for explicit approval.
But GameStop, and to a much larger extent, AMC Entertainment, show that when the Reddit crowd shows up in your stock, you’re much better off if you’ve something to sell them. AMC managed to sell $304m into the Reddit bid, and Silver Lake converted $600m of convertible bonds at a price which was wildly out of the money before WSB showed up on the scene.
That was enough to get AMC Entertainment out of its coronavirus hole for a good few months. At the start of the week, it raised a $900m liquidity package to “allow the company to make it through this dark coronavirus-impacted winter”, so adding nearly another billion on top could make a crucial difference to its chances of corporate survival.
Hertz’s US entity in the middle of last year even managed to sell stock during bankruptcy to a crew of enthusiastic retail investors, before the SEC put a stop to it.
With that in mind, a prudent CFO at any challenged firm will want an at-the-money offering ready to go, to turn a frenzy of speculation into cold, hard corporate cash.
'Diamond hands' make light work
This is only a possibility for listed firms, but the chance to sell shares to Redditors is a lottery ticket — not a viable strategy. For many of the companies struggling with the impact of the pandemic, a private owner — whether sponsor or entrepreneur — may be a better option.
The problems of a listing were underlined just before the US election by Aston Martin, which was forced by its quarterly reporting timetable to miss the best window for a rescue refinancing. The deal was done but the firm paid a double-figure coupon — very early 2010s — to raise new secured debt, while privately held Boparan, a basket case for more than a year before, was able to pick its window perfectly.
Cineworld, too, has found the glare of public scrutiny — and the big margin loan its owners took against its stock — something of an obstacle to its turnaround proposals.
In general, a tight shareholder base, carefully controlled disclosures, and a limited list of creditors make it easier to work out a way forward for companies in trouble.
The fewer parties around a table, the easier negotiations ought to be. If the relationships are too cosy, this creates its own risks, but the broad point is right: when the going gets tough, the transparency rightly demanded of the publicly listed can be an obstacle to finding solutions.
Far better to have a few true believers owning and lending to a firm in difficulty than a broad base of public market shareholders — “diamond hands”, in the terminology of the new capital markets big swingers of Reddit.
GameStop and AMC show a new possibility in corporate finance, but it’s not going to be open to all, or even many, companies. The effervescence of the WallStreetBets herd has been channelled this week into squeezing silver instead, of little use to any Covid-battered industry.
Better by far for struggling firms to stick to the tried and tested approaches to getting through this crisis, rather than wait and hope for bailout by meme.