This month’s 3.5 percent drop in the Dow Jones industrial average is doing more than putting the squeeze on average investors — it’s also socking the country’s wealthiest money mavens by slamming shut the window of opportunity for initial public offerings.
Several of what was expected to be a bumper crop of IPOs in early 2010 have been postponed, while some business titans have been forced to pull their offerings outright. Tapping the public debt market is a tried-and-true method of supplying cash to fuel growth, paying down debt or helping owners — private-equity companies and others — cash out of their investments.
Without the flow of public cash, some companies may struggle with financing.
“We were probably more positive at the end of the year about IPOs than we are right now,” said John Lynch, managing director at private-equity firm CCMP Capital, at an industry conference last week. CCMP filed a prospectus to take generator-maker Generac Power Systems public, and seems determined to push it through in a tough market.
Others haven’t been so gutsy. IPOs postponed in recent days include:
* Terreno Realty Corp., a San Francisco real estate investment trust, which cut the size of its offering, then delayed it by a week before the down market forced a cancellation.
* HealthPort Inc., a healthcare information tech company, withdrew its IPO last week because of unfavorable market conditions — two months after delaying it for the same reason.
* Daqo New Energy Corp.’s $10 to $11 offering, which had first been pared down in size.
Even those that got off the ground in the market rally during the second half of 2009 have been rocked. For example:
* Cellu Tissue Holdings, a maker of processed tissue for diapers, went public at $13 a share on Jan. 22 but has traded down every day. It closed Friday at $11.10.
* Apollo Commercial Real Estate Finance, Leon Black’s new venture, took off on Sept. 24 at $20 a share but closed Friday at $17.67 — and has never traded above $19.
The rough going could stop companies from moving forward to launch their IPOs. There are 75 offerings currently in the pipeline seeking to raise $13.6 billion, according to Dealogic. That is about half of the money raised in each of 2008 and 2009.
“Historically, one can only project last week, this week and next week,” said John Fitzgibbon, founder of IPOScoop, and market conditions could quickly recover.
At Freescale Semiconductor, the owners may be hoping to pay down debt with their IPO.
“A month ago an IPO was an option they could pursue, but Freescale’s options are diminishing,” said a high-ranking debt trader, adding that Freescale is the most heavily shorted company. Traders short positions when they feel they are overvalued.
Now, Freescale may need to spend all of its $1 billion in cash to lenders to avoid being penalized with a higher interest rate later this year.
Blackstone-owned Graham Packaging, a maker of plastic containers, is pushing ahead with its IPO plans.
Private-equity-owned companies reportedly owe $840 billion in loans and bonds by 2014 so there is a need to get going, even for the majority of companies that are not immediately hitting the debt wall.
Charles Ditkoff, a Banc of America Securities banker, said, “If a PE firm cannot get the right valuation they’ll wait. However, if the company has 2011 or 2012 maturities they may still go public so they don’t get [caught without enough cash to pay down debt].”
The high-yield markets have been flush with capital giving many private-equity firms the ability to refinance their debt, though not significantly reduce it, by taking out new loans with higher interest rates and later principal payment dates. That strategy, though, will not work for all private-equity-owned companies as some, like Kohlberg Kravis Roberts-owned First Data, cannot afford to pay the higher interest rates that come with refinancing.
“IPOs are such a critical part of the whole refinancing plan, that maybe some companies that were going to scrape by are not going to,” said Standard & Poor’s Vice President Chris Donnelly.
