Corporate Finance: Thawing out

It is not quite business as usual, but firms are finding it surprisingly easy to raise money again.

With its shelves laden with affordable goods, a quarter of which sell for $1 or less, Dollar General has prospered like few other companies during the current recession. As newly frugal American consumers have traded down, its sales have soared, increasing its profits to $83m in the second quarter, compared with just $5.9m in the same period a year earlier. Other retailers have been shutting stores, but Dollar General plans to add 500 new ones to its existing 8,577 this year.

The company is expected to cash in in another way soon, with an initial public offering (IPO) that will be one of the biggest in recent years. The IPO market, having slammed shut during the financial crisis and ensuing recession, is now open for business again: Dollar General was one of 16 firms to register to go public with the Securities and Exchange Commission in August, the most in one month for a year. In the last full week of September there were seven IPOs in America, the busiest week since December 2007 and more than in any month, let alone week, since May 2008. In the six months after the collapse of Lehman Brothers in September 2008, there were just two IPOs in America.

The return of the IPO is evidence of the remarkable strength and breadth of the unexpected thaw in corporate finance. Banks may still be reluctant to make loans, but debt and equity markets have regained a hearty appetite for risk. Moreover, the apparently avid interest from investors in a firm such as Dollar General, which will do best if the economy remains weak for years to come, suggests there may be more to the thaw than an irrationally exuberant belief in a V-shaped recovery.

This has come as a huge relief to chief financial officers, who barely a year ago were having to make do without a fully functioning market for commercial paper (short-term loans to finance operating expenses). Even mighty GE, which still boasted a top-notch credit rating at the time, resorted to extreme measures. The American conglomerate ended its share-repurchase program, paid unprecedented interest rates on its commercial paper and raised capital from Warren Buffett, a celebrated investor, on terms that in normal times would have seemed exorbitant.

Today the market for commercial paper is functioning smoothly again, especially for investment-grade firms such as Johnson & Johnson, a drugs firm, which is paying less than a tenth of a percentage point above the Treasury-bill rate to borrow overnight. Debt of longer maturity is also available to creditworthy firms at lower interest rates than before the financial crisis. “We have actually had big investors from the likes of Pimco and Fidelity call us up to encourage us to borrow more,” says the treasurer of a blue-chip multinational, referring to investment firms that are big buyers of corporate debt. In contrast to the 1990s, when many blue-chip firms went on a spending binge, big firms were generally in decent financial shape going into the crunch. But they are still seizing the opportunity to strengthen their balance-sheets further.


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