Firms Raise $28.5B in IPOs for Debt, Amid High Borrowing Costs

Companies increasingly opt for equity financing to cut debt, with $28.5 billion in IPOs for debt repayment marking a 56% year-on-year increase.

By Max Weldon

5/16, 00:21 EDT

Key Takeaway

  • Metals Acquisition Ltd. raised A$325 million through equity to cut debt, exemplifying a broader trend of $28.5 billion in IPOs for debt repayment.
  • Rising borrowing costs drive companies towards equity financing, with the S&P 500's 28% rise supporting this shift despite a modest 4.5% increase in share sales.
  • Investor selectivity intensifies as companies like La Rosa Holdings and Whirlpool Corp. use IPOs and equity sales for strategic financial moves amidst high interest rates.

Equity Financing Gains Traction

As borrowing costs rise in the post-easy money era, companies are increasingly turning to equity markets for funding. Metals Acquisition Ltd.'s acquisition of a copper mine from Glencore Plc for almost $900 million is a prime example, with the company raising about A$325 million ($216 million) through an equity raise in Australia due to high demand from investors. This move was driven by the desire to reduce leverage and take advantage of the rising copper prices. CFO Morne Engelbrecht highlighted the strategy of replacing high-interest liabilities with equity, keeping future equity raising options open based on share performance. This trend is not isolated, as corporates have completed $28.5 billion of initial public offerings (IPOs) in the year through April for debt repayment purposes, marking a 56% increase from the previous 12 months.

IPO Market Responds to High Borrowing Costs

The tightening of monetary policy has made equity raises more attractive compared to the era of low-interest rates. Evgenia Molotova of Pictet Asset Management Ltd. notes the growing appeal of the IPO market amidst uncertainty on interest rates. The stock market's robust performance, with the S&P 500 index soaring about 28% in the past year, supports this shift towards equity financing to reduce leverage. However, the expected surge in equity placements by listed companies has been tempered by previously agreed cheap borrowings during the pandemic, with only a 4.5% increase in share sales in the four months through April compared to the previous year.

Investor Selectivity and Private Equity Challenges

Investors are becoming more discerning, demanding price discounts for IPOs aimed at recapitalization. This poses challenges for private equity firms that have heavily leveraged companies in anticipation of valuation boosts from rate cuts. Nicole Kornitzer of Kornitzer Capital Management Inc. points out the impending "reckoning" for debt payments as interest rates remain high. Metals Acquisition's strategy of using equity to reduce leverage and create shareholder value exemplifies a proactive approach to managing debt. Similarly, La Rosa Holdings Corp. and Whirlpool Corp. have utilized IPOs and equity sales for debt repayment and strategic acquisitions, highlighting the varied motivations and benefits of equity financing.

Street Views

  • Evgenia Molotova, Pictet Asset Management Ltd. (Neutral on IPO market):

    "Higher borrowing costs are starting to bite... With a high level of uncertainty on interest rates," it makes sense "to tap the IPO market as that’s opening up, even though the valuations are nowhere near the 0% interest rate super-charged era of Covid."

  • George Maris, Principal Asset Management (Bullish on equity raising for leverage reduction):

    "The strength of stock markets means raising equity to take out leverage is not a bad thing at the moment."

  • Tom Snowball, BNP Paribas SA (Neutral on listed companies' equity placements):

    "We frankly haven’t seen the level of issuance we might have expected to see... Are companies going to need to turn to equity if rate cuts keep being pushed out? That remains to be seen."

  • Luc Mouzon, Amundi Asset Management (Cautiously Optimistic on IPO candidates with growth or M&A-related debt):

    "Companies can’t expect us to pay up for their ability to lower interest rates via public listing but, that said, not all debt is the same... We prefer IPO candidates that have growth or M&A-related debt on their balance sheets than those that are so levered that their free cash flows are eaten up by the service of the debt."

  • Nicole Kornitzer, Kornitzer Capital Management Inc. (Neutral towards private equity's approach in higher-rate environment):

    "With rates staying higher for longer, the reckoning is coming in terms of debt payments... Private equity needs their money back, so they’ll have to consider IPOs."

Management Quotes

  • Morne Engelbrecht (Metals Acquisition Ltd., CFO) :> "The equity markets were screaming out for a copper name" after the price of metal rose. “I took those high-interest-bearing liabilities out and we’ve still got that opportunity”
  • Joe La Rosa (La Rosa Holdings Corp., CEO) :> "Listing allowed them “to go out there and be very aggressive on M&A side and that’s why we’ve had 10 acquisitions since IPO,”
  • Jim Peters (Whirlpool Corp., CFO) :> "Home appliance manufacturer Whirlpool Corp could consider raising money via equities markets if it was do significant acquisition."