Breakingviews: Equity markets hatch a chicken-and-egg scenario

Does cash make a company strong, or do only strong companies get the cash? Equity markets are putting it to the test. May has already seen a record number of issuances of stock – beating the previous monthly peak set in December 2009. Selling stock and other similar investments to fortify coffers beats raising more debt for most companies. But finding cash will also be easiest for those that already have it.

So far this month 135 companies raised $69 billion globally, according to Dealogic, beating the previous record of $64 billion. While business has withered, stock-market valuations haven’t. Government support topping $3 trillion around the globe has kept the S&P 500 Index only 10% below its pre-Covid-19 levels. That gives companies a decent opening to cement market valuations at near pre-pandemic levels. Raising equity means companies don’t get stuck with extra interest payments, or breach existing debt covenants.

Some big names have already indulged. Beverage maker Keurig Dr Pepper filled its glass with a $1.1 billion equity offering. Coffee chain JDE Peet’s, which like Keurig counts JAB Holding as a big investor, set the price of an initial public offering this week. Both deals could leave the companies with an opportunistic acquisition war chest. Meantime Warner Music plans to raise up to $1.8 billion in an IPO, according to a regulatory filing this week. And some growth companies are also finding financing – like Carvana, a U.S. company that sells used cars from multistory “vending machines,” which raised almost $500 million last week.

Cash is precious, and investors can be selective. Besides, companies that are failing because of Covid-19 may yet emerge from restructurings as more attractive investments, stripped of their debts. Since Friday, car rental group Hertz Global, sandwich-maker Le Pain Quotidien, and retail chain Tuesday Morning all filed for bankruptcy. Picking companies in decent shape is hard when revenue is collapsing across the board, but those who get the investor stamp of investor approval will be the ones that already look like winners.

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