Market slump puts capital-hungry companies on a diet
Harry White did not want much from the stock market. All he needed was $2.5 million to pay for a marketing blitz for an electronic device his year-old company, Sycon Inc., started selling last week.
But at the end of August, Mr. White, its president, called off a planned sale of Sycon stock. "Under existing [stock market] conditions it would have been very difficult to sell" stock to investors, he says. So now he's looking for private individuals who want to pump cash into Sycon, which makes signature verification equipment.
Sycon is not alone.
* Connecticut Light & Power Company's plan to sell $65 million in debt blew a fuse.
* Tape Specialty Company's hopes of selling $3 million in stock came unraveled.
* Republic Airline Inc.'s plan to sell $50 million worth of debt convertible into stock never got off the ground.
Executives at both fledgling companies and established concerns who want to put cash into their corporate pockets are running into roadblocks caused by the depressed level of stock and bond prices.
Low stock prices cut the amount a company can raise by selling shares. "In bad markets you have to bring the price [down] to where it is presentable," says Thomas McChesney, syndicate manager for Paulson Investment Company of Portland, Ore.
And depressed bond prices mean companies are faced with paying rates of interest on debt instruments that most corporate treasurers find unacceptable.
As a result of current market conditions, firms that are not desperate for cash are delaying equity (stock) and debt (bond) offerings in the hope the markets will improve. And those that must raise cash now are paying a high price to do so.
Although the new-issues market had been relatively unaffected until recently, for the past two weeks new enterprises have been "holding back on issuing" their first shares of stock, says Joel Lawson III, managing partner of Philadelphia-based Howard & co.
Mr. Lawson notes that there is a backlog of 200 companies that have registered their stock for sale with the Securities and Exchange Commission but have not brought their issues to market.
"More common than announced cancellations are deferrals of plans" to issue stock, notes Christopher Clutz, first vice-president in Smith Barney, Harris Upham & Co.'s corporate finance department.
Meanwhile in the bond market, "the availability of debt borrowing is limited and the cost almost prohibitive," says Mr. McChesney at Paulson Investment Company. Bonds rated Aaa by Moody's have recently been priced to yield more than 16 percent.
The high cost of selling debt has persuaded US corporations to postpone an estimated $18 billion in debt issues which companies said they would issue but still have not brought to market. "Debt offerings by industrial companies have been radically curtailed," Mr. Clutz notes.
Of course, not all companies can delay spending plans as a result of the market gyrations. "When you need money, the demand is not real elastic," says Wayne Guin, director of security financing at the American Telephone & Telegraph Company. "You have to go after it."
So far this year, Bell companies have sold $3.038 billion of debt and plan to raise an additional $650 million by year's end.
Some companies are avoiding the impact of market upheaval because they had not planned to issue long-term debt. For example, General Motors Corporation, while it borrows overseas to finance international operations, has not been in the US bond market since 1975, according to GM treasurer Robert T. O'Connell.
Using funds from operations and overseas borrowing, GM laid out $7.6 billion in 1980 to overhaul its assembly plants and car lines. Capital spending in 1981 "will be somewhat higher [than in 1980]," Mr. O'Connell says. "There have been no alterations in our plans due to interest rates."
Most companies, however, have to cope with bond market conditions and are adopting a Variety of strategies to do so. Some are proceeding warily. For example, Caterpillar Tractor Company is planning to sell $150 million in five-year notes in October to help pay for a recent acquisition. But sources close to the company say that if "rates move up again, we just won't sell" the notes.
Others have cut the size of their offerings to make debt easier -- and less costly -- to sell. This week Ohio Edison Company reduced a bond offering from $ 100 million to $75 million. "Our underwriters felt that going for $100 would have been difficult," says Edison information director David Poeppelmeier.
Some corporate treasurers have decided to beat a strategic retreat. Connecticut Light & Power canceled a bond issue because "we couldn't get a good reading" on on the price the offering would bring, says the utility's executive vice-president, E. James Ferland.
Republic Airlines canceled an offering of debt convertible into stock and "the day we were pricing the bonds . . . the Dow dropped 18 points. The market [for our bonds] evaporated," Republic treasurer Howard McKinnon says.
While bond market upheaval most often affects larger, longer-established firms, unsettled stock market conditions hit both large and small companies but make life especially difficult for new firms that want to sell stock. As a result new companies are redesigning their money-raising plans.
For example, Tape Specialty, which makes audio tape duplicating equipment, had planned on a common-stock offering. But its investment banker suggested Tape restructure the deal and sell debt convertible into stock. The debt is being packaged with warrants that allow an investor to purchase stock at fixed price.
"When you have a market decline there is little reason for the investor to be interested in a new, speculative issue when he could buy an existing company at a cheaper price," says Paulson's McChesney. ""You have to give investors a reason to want to own the company.