How the stock market’s relentless rise saved companies

Last spring, just as Denny’s was shutting down its nationwide chain of 24-hour diners for weeks of pandemic-induced lockdowns, its lenders were warning it to quickly pay down its debt — or else. With banks demanding prohibitively high interest rates, Denny’s leaders turned to the last clean, well-lighted place in corporate America: the stock market.

Denny’s issued enough new stock last year to raise almost US$70 million ($97.7m) — not enough to solve all its problems, but enough to avoid catastrophe. And it was just one of many companies saved by stock investors who snapped up their shares as the market marched higher, seemingly impervious to the effects of the pandemic.

The trend, in which stocks go up even as the economy flounders, has continued into 2021, and companies are still taking advantage of it. On Thursday, AMC Entertainment Holdings became the latest business to try to soak up the benefits of the absurdist market dynamic. The movie theater chain, facing an existential threat from the pandemic, announced that it was issuing 44.4 million more shares of stock.

In addition, a group of Wall Street lenders that AMC owed US$600m said they were converting the debt into stock, betting they could get more money from retail investors bidding up the shares than from the company’s own payments.

This is not the way things usually work.

“It’s been years, really decades, since the corporates turned their backs on the banks,” said R. Christopher Whalen, a money manager in New York.

It turned out to be a mutually desirable split, Whalen said: Companies rounded up the cash they needed, while banks avoided making risky loans at rock-bottom rates and instead earned their keep by helping the companies sell more stocks and bonds.

The trend predates the battle between retail investors gathered on Reddit and hedge funds trying to short the stocks of struggling companies, most notably the video game retailer GameStop.

Consider Denny’s. Traders had several possible motivations for buying its stock. Some may have wanted to ride any short ascent triggered by news of easing restrictions on restaurants. Others may have decided that Denny’s stock had fallen so steeply — from almost US$21 in early February to just above US$5 in mid-March — that it had nowhere to go but up.

But some of the market activity in 2020 simply made no sense, such as when investors piled into Hertz stock after the company had declared bankruptcy, effectively wiping out equity holders.

Whatever their impetus, buyers were not acting from benevolence. For much of last year, they were hungry for some sort of return on their money. Anything would do when the Federal Reserve had slashed interest rates to zero and started snapping up government debt, pushing Treasury yields to historic lows.

And American companies were there for them, ready to issue more stocks and bonds at every turn.

Among the top issuers of stock last year were companies in dire straits like Denny’s: American Airlines, United Airlines, and the cruise ship operators Carnival and Royal Caribbean, according to Dealogic, a company that tracks new stock sales.

“We have believed all along that the foundational elements of our business remain strong, and there continues to be widespread enthusiasm and excitement about cruising,” said Carnival’s chief financial officer, David Bernstein, when asked if the market’s reception to Carnival’s offerings had surprised him. “We have been pleased and gratified to see the market’s reaction to our past offerings as a result.”

Carnival and the other issuers were lucky to have found investors ready and waiting, since banks were not.

Companies can borrow money by taking out a bank loan or by selling equity to investors. The borrowed cash can then be spent on everyday expenses, new investments or stock buybacks — at least during normal times. Last year, however, many of the companies that issued large amounts of new stock and corporate bonds needed the cash to survive.

Carnival raised US$4.5 billion in new stock and bond sales in the fourth quarter alone. Its chief executive, Arnold W. Donald, said on a January 11 call with analysts that the offerings had been “very well received,” but that they had also been necessary. Carnival is facing a “zero revenue environment” to start this year, Donald said. In other words, investors’ cash is the only way the company can keep operating.

Even the airlines, which, unlike cruise companies, are not completely shut down, are relying on cash from Wall Street. American’s total debt load surpassed US$40b last year. On Nov. 10, when the company proposed issuing 38.5 million shares of its stock, it said in a statement that the money would go to “general corporate purposes” and to “enhance the company’s liquidity position.” Translation: American needed more help paying its bills.

Companies hit hard by the downturn also opted to issue bonds to raise cash last year — a record US$2.28 trillion, 60 per cent more than in 2019, according to figures from the Securities Industry and Financial Markets Association. This was an attractive solution after the Fed cut rates and even began buying up corporate bonds itself to steady the market.

But issuing stock has its own appeal. For one, it’s not debt that needs to be paid back. Overall, companies issued US$342b of stock last year, 76 per cent more than in 2019. Initial public offerings brought in US$85b of that sum, which means that most stock sold last year came from companies that sold additional shares to raise money.

According to Dealogic, the heaviest issuers were property investment and development companies, many of which are vehicles for investing in shopping malls and collections of office buildings, where rents plummeted during the lockdowns. They were followed by health care companies. Companies in leisure and recreation were the sixth-most-frequent issuers.

Wall Street banks take a juicy cut of almost all of that activity, whether companies are issuing stocks or bonds, and record fees in those businesses helped smooth over what would have otherwise been a grim year.

Banks took in US$17.36b in revenue from their equity markets business last year, up 121 per cent from the previous year, according to data from Dealogic. Fees from helping companies sell bonds were almost as high, jumping 60 per cent to US$11.30b.

That revenue was crucial as other businesses that Wall Street specialises in, such as lending directly to corporations and households, suffered. Banks also reserved billions of dollars in expectation that the sharp economic decline caused by the pandemic would set off a surge of defaults and bankruptcies, making it impossible for them to continue collecting interest payments on outstanding loans.

In January, the country’s largest banks revealed they had begun releasing some of those rainy-day reserves. But there was more. As Bank of America’s chief financial officer, Paul Donofrio, put it, banks are returning to more normal standards for lending money.

“Across the industry — and as appropriate during a recession- or depression-like situation — you’re going to be careful about extending credit,” he said on a January 19 call with journalists to discuss the bank’s fourth-quarter earnings. “I think most banks like us are on their way back to the credit standards pre-pandemic.”

Written by: Emily Flitter, Matt Phillips and Peter Eavis

© 2019 THE NEW YORK TIMES

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