« Exchanges at Goldman Sachs

Raising Capital: How Corporate Financing Strategies Are Evolving

2022-03-08

In the latest episode of Exchanges at Goldman Sachs, Beth Hammack, Goldman Sachs’ co-head of the Global Financing Group in the Investment Banking Division, explains how tightening financial conditions and volatile markets are affecting companies’ ability to raise capital.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges at Goldman Sachs, were reduced. The development shaping industries markets and the global economy? I'm alpha Nathan, sooner strategist uncommon. Sacks, research in today's episode we're going to take a look at how the volatile markets and tightening Financial conditions are affecting companies, ability and willingness to raise capital to help us understand how companies are approaching their financing needs in today's economic climate. I am delighted to be joined by Beth Hammock Goldman Sachs as co the global financing group within our invest. Some baking division, Beth walk over them thanks so much for having Alison so just to set the state
companies have raised a record amount of equity and dead across the capital markets. Thanks to record low interest rates. We ve had a ton of monetary stimulus coming through the economy and there has been strong investor demand, but we seem to be at an inflection point. You know we are entering a period where the FED is going to be raising interest rates at the market is responding to that. So how have financing conditions evolved for companies in general to twenty Twond, one was a spectacular year for financing. We had wreck difference markets in equity, not quite record, and that but very strong markets in debt and obviously twenty twenty two is shaping up to be something quite different: the volatility We ve, seen from the beginning of his ear, really kicked off with, as you noted, the FED and the rhetoric change it. They had coming out of the minutes that we got on January sex and then moving into their first meeting that they had later that month, at all the way through, we ve seen either the markets now gearing up for the first hike happening in March, and I think we went from it
We are coming out of the end of last year. We had really you wrote asked amounts of fiscal stimulus, monetary accommodation put in to wear in a pretty short period of time. The markets are started, pricing and not one. Or two eggs for the year, but six seven hikes for this year with rates moving up pretty significantly, and so you really seen companies and the market start to rethink valuations and rethink about what that's gonna mean for overall, financing picture and so markets have been open for sure? But it's been a little bit more stress. We ve seen some markets be incredibly robust. The leverage finance market continues to be. Credibly strong, driven by a lot of sponsor activity, but the equity markets have been more challenge and we ve seen a lot of that underlying volatility in the equity markets play through both evaluations in sector rotations and a lot more from themes and I'm sure will dig into yeah. I mean if we could talk alive it in more detail about action, the capital markets right now. How does it really compared to what we saw last year, access
where the debt markets a robust? So in January we actually had the largest amount of elbow issuance in the leverage finance market, so we ve seen since October two thousand seven at thirty billion dollars, so is really strong. There's a lot of demand and certain pockets of the market, things which are floating rate or getting more demand them or seeing in the fixed rate market. But the agreement I've been really challenged. The problem in the equity markets for Chick fil a for an issuance perspective, is it it takes a while to go through the process of doing an ipo, and when you have market volatility and evaluations changing so rapidly companies when you're, taking that really pivotal moment of coming to the market for the first time they want to know that they have got a stable backdrop and that they ve got some confidence around where their deals, gonna price and how it can be received, and when you have markets moving two percent a day up and down in different directions. It just makes it very hard to navigate that and you think there's to be more volatility, as you come up to the next FED meeting and ultimately, do you think a lot of this is price din and the market is expecting, you know, what's the com or there could be more voluntary? Well there. Certainly,
be more volatility, though I wouldn't imagine will be driven by the FED. At this point, I think in the market is certainly thinking about what the feds gonna do at this particular meeting, whether its twenty five or fifty basis points, but in reality for investors, twenty five or fifty or what they do in the front and really isn't the key issue. It's really about that long term rate about how many I they think we're gonna have and how quickly the fat is gonna get to whatever their terminal rate. So everyone agrees that rates are going up. It's just a question of how much and how far we're gonna end at where I think until these likely to come from is probably geo political events as seen from the past week, and so obviously The events in Ukraine and Russia came on much faster than I think the market was anticipating and obviously that's created a lot of uncertainty, the sanctions that are being rolled out there, tremendous and having broad impact, as I think the governments, the coordinated western governments desire? But I think there are other forces at play that clearly could drive more than somebody had- and at this point it does seem
that, as you said, interests are going up, and so are you seeing any indication that you know companies art is willing to borrow less looking at a higher cost of borrowing. You know its have gone up modestly. So we talk about them going up in it feels like its transformational, but you have to remember that the ten year rate is still right around two percent on either side of it at any point in time, and so you know right now we're down to about one. Seventy five, given the geopolitical events, and so in the grand context of the past five or ten years, it's actually quite low. We ve also seen over the couple years accompanies really did a lot too. Sharp their balance sheets into companies are entering this period with really strong balance sheets, having refinance very heavily through twenty twenty and the height of the current crisis, and also laughter and twenty twenty one. When there is tremendous stimulus and accommodation demand, and so what we ve seen this year is a modest widening and credit spreads, so in investment grade spreads have widened around fifty basis points here today and in high yield. It's probably around two hundred and fifty basis points. Now. That's all Like a lot, those are big numbers, but if you look over past ten, your average were still in the tighter part that were built
that ten, your average already the basis, and so it still has recently attractive time for companies to come to market. And so again the debt markets have been pretty robust. The equity markets, as we talked about even volatility a little less so, but our pipeline is growing. So there is still plenty of comfort that want to come to market and want to look at it and we're seeing them spend more time on the other partner balance sheet, particular companies who think that their stock has been really undervalued by the market. Looking a chair purchases, satanic, But more about that about the activity in the pipeline. Like where'd, you see it coming from your what you expect. Twenty twenty two might look like so my point is very robust- is as high as it's been and continues to grow. The backlog grows. Unfortunately, given that execution in the marketplace has been more challenge, I think what will find if the market stay, this volatile and stay close as the companies will try to find alternative ways to come to market, so whether is take privates through whether it sponsor activity or just buying back meaningful shares. The company that's one way of thinking about it. Another is that they could look to do things for companies that have outstanding debt,
look at follow wants would be we think, quite common the private markets have been very robust, so whether its pipes, private investment and public equities or more traditional non registered transactions, convertible dad other taxes, nations there are a lot of opportunities and options available to companies right now. One of those options that we, a lot about this pike ass, his specks specks. You know they were so in focus in the last year or two really and now it looks like so much more challenging environment. So what are you expecting from that side of things? It is a much more challenging environment. First box. You know this back. Ip Yo has been really difficult, as your last year was a tremendous record in terms of what we saw and really an anomaly with you.
from a historical contacts in terms of the amount of issuance that we saw in that space, you know was over five hundred deals last year, raise, I think, over six hundred billion dollars of capital in that market, and so was really a tremendous capital raise in blank cheque. Companies companies that maybe it had some track record of leadership, are picking opportunities, but you know not essentially as robust, and so what I say is because last year was so robust and we did see a tremendous number of dese backs last year as well. This year, you clearly can compare one of the trends that we ve seen this year. Is it a lot of those dese backs from last year? The speck mergers are actually trading below the IP price, and so that's putting sure, on the thesis on these companies. One of the benefits of doing a merger going public through his back is that you can use projections, but them It really relies on those productions and thinks about where companies are going to be over the longer term and a lot of these companies, big, were created in this way haven't met those productions, and so I think that's putting pressure on the market. The other thing that we ve seen so far this year is
redemptions are high. So when you have that moment of the combination, investors have the ability to redeem if they dont want to join part of a new company going forward and one that was running I'd, say in the forty percent last year. It's running about the eighty percent now, and so the certainty of that capital raise in that respect. Merger is not quite what it was in twenty twenty one. The trend that were keeping a close eye on. Is there still six hundred specks out there that are looking for partners that, when public last year and this format that are looking four deals to consummate course us here, and so we do think that that hunt is gonna continue, but obviously the virus can be higher, given these higher redemptions that we talked about. But the end of the day It is all about performance. So what do you think that under performance that high level redemptions was too
Are they going to host? Was real change in tone? In the market, so with the new macro environment, with the FED tightening what we ve seen as a real rewriting of growth- and you ve seen a shift in terms the hot sectors in the equity markets and what people are looking at so last year allow these speck mergers. These backs were really in the tech sector, and you ve seen some real pressure and tech companies, particularly this year, particularly on companies that are unable to show profitability. There's a real focus right now on. Profitability is your seeing the very top of the equity market, the largest most concentrated most important technology. Companies continue to do very well, but these companies are a promise of profitability. Have good revenues, have good growth stories but haven't been able to turn a profit. Yet there's a lot more uncertainty about that, given the rising rate environment and the amount of stimulus it's coming out of the economy, and so that think is one of the key drivers. Parities talking about other structures in addition to specks, but you know are We setting up for spin off what else our sea is thinking about right now. Spin offs has definitely been a hot topic. That's one where we see a lot of focus
this concept of shrink to grow, so the ability to take your company to a more narrow, more dedicated, focused goal. has been one that has really been a popular through the end of twenty twenty one and into two thousand and twenty two. It gives management. You do greater focus on the independent business lines. It allows them to tailor the capital structure to be more efficient for the business that they're running and it allows them to have a currency in their business that they can use for future anime. That's more appropriate, give them a better multiple for the business that they're running, and so we can't I think that this can be a place where we see a lot more interest and what about chair by back environment is that something companies are focused on, so we ve the tremendous pick up and share by backs this year? It's been incredibly robust. This year were two hundred and thirty billion. That's been announced relative to an and billion at this time last year and one that we're seeing given to have the debt markets, though we ve talked about the fact that rates are elevated and spreads or wider, we're seeing companies issue debt to engage and share a purchase. So just last week we did a high yield bond for twitter. A billion dollars at five percent coop
and that they are used to fund a partially fund. A share. A purchase, including an accelerated chair, purchase or ass, are of two billion dollars, and so we say but he's saying that they view their stock has been undervalued and they want to send a strong message to the markets and so they're going in and engaging in buying back their suck at. So let's take a drop into the fixed income side. You started talking about this, but you know what are the ways in which company different ways the companies are pursuing debt in this environment. one of the trends we see in this year's at the loan market, which is typically floating rate and a little bit higher in the capital structure than the bond market, particularly in the leverage fans, are high yield. Space has been much more robust and so we're seeing tremendous demand and the bank loans space, I'm a little bit less so in the bond space, and so typically those markets tend to be somewhat balanced, but issuance so far this year is thirty, six billion and higher bonds, but ninety seven billion in loans, and so that twenty Seventy five shaft is really somewhat anomalous and reflective of the higher rate environment that were entering that said, Inga we're seeing
Other themes underline that as well. One is continued credit, dispersion and so you're, seeing a real differential in a real underwriting of the company. So maybe it points in twenty twenty or two thousand and twenty one. It was just about getting your hands on paper and it was just about eighty finding a place to put your cash, given the overwhelming amounts of cash that we had in the system this year, this can be chooser and they're doing, lot more diligence are doing a lot more diving deep into the companies into the underlying financial to understand what the business proposition is that sad leverage still seems reasonably contained. We're not seen a lot of deals, push about that seven times, leverage which can be a concern for a number of different metrics in terms of interest coverage and how stressed companies can be over time and in the end, hungry space. We ve seen tremendous amounts of financial assurance so far your date its have also been very engaged in the market, but the financials
they tend to be a robot savvy about how rate markets are trending and say you ve seen them come very strong early in the market to take advantage of low rates. They tend to be a bit more shorter dated and the duration that they issue tend to be more and not five year type part of occur, and so the average duration that's come to market has been shorter said we are seeing corporates look to lengthen their duration and particular corporates who have much larger debt footprints. So someone like an eighteen tee, who has the largest at footprint outstanding, also has the longest duration of any ashore outstanding, which helps them to have more certainty that they'll be able to meet their interest coverage overtime and that's a trend extension induration that we expect will continue through their right, consistent the changing interest rate, environment, lengthening duration, exactly- and you know again when we think about the theme, we continue to hit on in our podcast. Yes, she's is one of I'm dance out. So how is the focus on EST right now translating to financing needs for companies and is that playing out differently across different sectors
products. These runs and ask you this year really have been around delivering on commitments, and so we ve seen companies who made a bunch of keys. Since last year, leading up to cop twenty sex and really identify what they wanted. Their positioning to be a number of net zero commitments from some of the largest corporations out there, and I think these companies are really working through. How can we best meet those commitments? I'm going to be really a variety of ways, so one may be looking at business lines. It no longer meet their longer term. It s cheek, also looking to divest in those business. Another might be. some structured finance to raise funds, They can use to invest in alternative energy and other transition projects, and the third might be looking at carbon offsets. Can they buy carbon offsets knots of market? That's just starting to emerge, but one that we think has even more promise when we get there,
standards and better consistency around how you evaluate some of these different projects, and so one of the things were finding. Is that not all of these goals and aims are created? Equal in every company has its own take on how they want to approach this problem, but getting some more standardization in the Eu S. She space, we think, will be really welcome and there's been a lotta leadership by both the EU and the UK. The? U S, coming on now. You ve heard the Treasury department and other regulators talking about this in talking about how can we get better transparency, better standardization in the market, and so that's a place where I think, we'll see a lot more coming this year, the other big focus digital asset, digital assets, how is that impacting? innovation were seeing and capital markets or the capital markets. More broadly. I think digital assets is phenomenally interesting. I think it's a tremendous white space that we can continue to innovate and, frankly to me,
one of the least interesting things about the digital asset spaces. What is today's price of bed quaint? For me? It just like it's something. That's out there is something we pay attention to, but where it's going at one point, another, I dont think, is a bigger signal of overall macro trans and overall financing environments for our clients. But I do think that digital assets holds a lot of promise. You see the investor base looking for ways to access their investments in their money, the way they do in consumer space, and we seen such tremendous innovation in the consumer space or you can move money in an instant using various. Apps and various in a closed network programmes, whether it be pay pal than many other types of situations where you can move money very quickly, and I think what we are seeing now in the market space in the institutional space is you'd like to see some of that organization or digitization of assets as well. Obviously, this is very difficult to do, because it's a highly regulated space for good reason. We need to make sure we ve got the investor protection in place that our customers need, but I think there's a lot of opportunity for us to use defy broadly to help move things online and move it into faster, whether it's faster settlements, faster
transactions. Certain markets, as you know, will take place over long periods of time, and so when I look at the loan market, this is a market that still happen, then spreadsheets and faxes right, that's a place that is ripe for disruption and innovation, but you're even seeing it in the classic bond market. So last year we did a digital bond for the ivy, which was the first of its kind, really a proof of concept, to show that you could do and on chain issuance for an institution- and I think will see more of that this year. I think we'll see. hope, move into other places, so maybe not just securities but may be hard assets could be real estate, could be other things. I think this is an incredible white space. It's drawing a lot of innovation intention. Let's end, with your outlook for corporate financing and twenty twenty. We talked a lot about what you expect this year, but you know we have come. A few years where companies or raising capital to make strategic acquisitions. They were acting very offensively. Do you think this is a year where they will pay to acting more defensively? I think volatility creed
opportunity, and so we're gonna see. Companies look to invest in their strategic growth over time and for some of them that maybe some of this spin off you know, shrink to grow which could view as being defensive for some of that, it will be fine in companies that they think are undervalued and looking to do more acquisitions and to grow from more classic emanate type fashion. So I think there's gonna be a lot of opportunities this year, as we talk about balance sheets are strong. I think companies are in a good position to whether this new rising environment, and I think it all depend on we see in the broader geopolitical space. In terms of how much we need companies shifting back into their domestic footprint away from sort of this globalization trend into more of a regional eyes or localised excellence. We will watching how this evolves. Thank you so much for joining US bath thanks for having Malsen. That includes this episode of changes that Goldman Sachs things for listening and if you join. The show we hope is describing up apple podcast, only aiding and comment this podcast is accorded on Tuesday March first, twenty twenty two
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Transcript generated on 2022-03-08.