Unicorns should listen to bears and raise equity capital

Recession fears are rising again as GDP slows, global trade tensions rise and overvalued stock markets become more volatile. Big tech should take advantage of high price to earnings ratios to raise equity capital now and to prepare for tougher days ahead.

  • By Sam Kerr
  • 13 Aug 2019
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Pick any indicators you like, the economic outlook does not inspire confidence. Here's one: in the most recent fund manager survey from Bank of America Merrill Lynch, 34% of respondents said a recession was likely in the next 12 months — the highest proportion since 2011.

The Harvard Business Review recently judged a $672m convertible bond from Amazon.com, issued in early 2000 — and that was meant to clean the company's balance sheet — as a transaction that saved it from oblivion when the dot.com bubble burst a few months later.

The Amazon of almost 20 years ago was in a similar position to that of some high growth tech firms now — huge potential but balance sheets dripping in debt and puny, if any, profits.

However, given that many of these firms trade at huge stock multiples, they should consider raising equity capital through either a convertible bond or a simple primary stock issuance. More funds would allow them to pay off debt or to make acquisitions that increase cash generation — which in turn could help boost companies' fortunes though a downturn.

Growth companies often depend on a supportive economy to realise their potential. The casualty list of the dot.com crash shows how perilous times can be for loss-making companies when confidence in them ebbs, regardless of their potential.

Streaming service Netflix is a great example of a company that could use its huge share price to its advantage and pay off debt.

The company issued $2.2bn worth of 10.5 year bonds, paying coupons of 3.875% on the euro tranche and 5.375% on the dollars, in April when it had already paid $136m in interest — a staggering 30% of its $459m operating income — in the first three months of the year.

Instead of putting more pressure on its balance sheet, Netflix could have raised $2.2bn by selling primary equity, which at the time would have diluted its shareholders by only around 1.3%.

Netflix’s share price has fallen since but it still has a market capitalisation of $129bn, thanks to its huge P/E ratio of 115x.

The company could theoretically issue around $12bn in new shares now, admittedly a huge ECM deal, and wipe out its debt while only diluting its shareholders by 9.3%, meaning if times turned tough it would have no debt burden.

Netflix is far from alone in being a highly valued tech stock with big debts. It may well thrive in a recession regardless, but markets are turning increasingly bearish and it never hurts to prepare.

Issuers are often adverse to diluting their valuable shareholdings, perhaps sometimes out of pride. But if you have a huge P/E ratio, it is about as close to free money as a company can raise in the capital markets.

The dot.com bubble showed that companies that prepare for a downturn are best placed to survive it.  

Many of this generation’s growth tech companies have never experienced a downturn and, should the cycle turn, firms will be better without having to service huge debts just as their income takes a dive.

  • By Sam Kerr
  • 13 Aug 2019

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 260,264.52 1167 8.49%
2 Citi 237,013.77 993 7.73%
3 Bank of America Merrill Lynch 202,540.22 831 6.61%
4 Barclays 188,016.56 770 6.13%
5 Goldman Sachs 147,310.58 610 4.81%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 31,872.91 136 7.74%
2 Credit Agricole CIB 27,567.28 117 6.69%
3 JPMorgan 23,570.89 63 5.72%
4 Bank of America Merrill Lynch 23,072.58 63 5.60%
5 UniCredit 20,250.58 112 4.91%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 8,331.89 50 10.24%
2 Morgan Stanley 7,744.92 38 9.52%
3 Goldman Sachs 7,137.50 38 8.77%
4 Citi 5,856.44 44 7.20%
5 UBS 4,823.67 25 5.93%