Big Companies Cashed In on Stock Rally With Flood of Offerings

(Bloomberg) -- The seven-week rally that pushed stocks higher by 30% was a great time to be selling, if you were corporate America.

The S&P 500’s surge -- a rally that’s looking increasingly shaky -- proved to be a boon for underwritten stock offerings, which raised more cash in the past three days than in any week in eight years. Buyers have been undaunted by warnings echoing Tuesday’s by Federal Reserve Chair Jerome Powell, who cautioned about unprecedented downside risk to the U.S. economy, and a prediction from Goldman Sachs that stocks could drop nearly 20% in the next few months.

On one level, strength in equity financing is a promising sign for the broader economy. Companies rely on these deals to stay solvent, with ailing firms such as Southwest Airlines Co., United Airlines Co., Norwegian Cruise Line Holdings Ltd. and Carnival Corp. tapping equity and equity-linked markets during the crisis. But it also qualifies as a bearish sign for investors who believe anyone parting with stock is expressing a view on future valuations.

“Now’s the time to act. The rally is extremely fragile,” said Michael Purves, chief executive officer of Tallbacken Capital Advisors, who spent 12 years advising companies on mergers and capital-raising. “When you’re a CFO or a board director of a company in a capital intensive industry, you raise money so that you don’t lose your job. That’s 100% the right thing to do now.”

The window may be closing. S&P 500 futures tumbled 1.2% Thursday, signaling a third day for losses in the underlying index as investors start to doubt the likelihood for a quick economic recovery and President Donald Trump stokes tensions with China.

Bankers have conducted 16 secondary offerings on U.S. exchanges since Monday in stocks such as Zillow Group Inc., Equinix Inc., MyoKardia Inc., YETI Holdings Inc., and Q2 Holdings Inc. Through Wednesday that already makes for the busiest week of 2020, according to data compiled by Bloomberg and excluding deals below $50 million. This week’s raised more than $17 billion from investors, the most since 2012, thanks largely to PNC Financial Services Group Inc. selling $12.1 billion of its BlackRock Inc. shares in the second-largest offering since 2009.

A dearth of deals during the market’s March meltdown has turned into a geyser after equities recovered and issuers released their first earnings reports since the new coronavirus pushed investors away from risk. Share sales by public companies and their top holders have raised about $35 billion since March 1, with this week’s activity comprising half of that volume. Equity-linked offerings are also on the rise, raising $11 billion in the last two weeks -- nearly double their haul from the second half of April.

It’s happening amid a raging debate over the rally’s staying power. Government stimulus to stem the effects of the health crisis may be “infinite,” Wells Fargo analyst Mike Mayo wrote in a note on Wednesday. Board rooms aren’t waiting around to see how the question resolves. Traders are rewarding these decisions, bidding their stocks up by an average of 5% from their offering prices despite a 2.2% decline in the Nasdaq Composite Index, according to data compiled by Bloomberg.

”If your stock has done well, you might do a secondary offering here because you know there’s going to be an opportunity to deploy that,” said Jerry Braakman, chief investment officer of First American Trust, in Santa Ana, California, which manages about $1.8 billion. “When people are looking at this current environment, cash is king and equity is a long-term holding.”

While it’s safe to say the situation now in the market defies historical comparison, the record for stocks after big surges in share sales isn’t encouraging. Monthly proceeds from secondary offerings surpassed $30 billion three times since 2010. Three months after those spikes, the S&P 500 was trading lower every time. Proceeds from this month’s U.S. stock offerings have surpassed $24 billion so far.

©2020 Bloomberg L.P.