Ready, Set…

YOGI BERRA
“You can observe a lot by watching.”
Yogi Berra

Market volatility this year has masked the fact that year-to-date returns have left many feeling stuck in the doldrums. However, there have been some encouraging announcements recently which make us optimistic for positive events down the road. Specifically, we’ve noticed that some private companies are interested in amending their capital structure by issuing equity.

To provide some historical context, let’s step back to early 2011, at which time the markets had recovered sufficiently from the depth of the crisis to permit previously private companies to access the capital markets for new debt issues, often with coupons in the 10-12% range. When one company in an industry issued debt, other industry players typically followed suit soon thereafter. We have written about this previously as it relates to the cash stores industry, but it is also applicable to many tech and media deals.

By mid-2011, companies were starting to look at the second step in this process: an initial public offering. An IPO not only provides owner’s potential liquidity (some of these owners are from 2005-2007 private equity deals) but it also helps to create more sustainable capital structures. As a bondholder, this can be great news as most high-yield bonds have an ‘equity claw’ in the indenture, allowing 35% of the bond issue to be called at a premium-to-par upon the equity offering. This provides deleveraging for bondholders (positive) and buys back some of the issue at a nice premium (positive) for bonds trading below the call price.

Fast forward to present day and the equity markets haven’t exactly been friendly to many initial public offerings (outside of some notable tech names). The silver lining is that this is creating a backlog of companies waiting for when the market conditions are more conducive for IPOs. Companies will eventually find a window to IPO (possibly as early as 2012), they will use the opportunity to pay off some debt, and they will improve their capital structure. This in turn makes it easier to refinance at lower rates and further improves their credit profile.

When we invest in a company, we like the company on its own right, but having a built in catalyst is a nice kicker. This option bodes well for the future of many companies that refinanced debt during the last credit crisis at high coupon rates, who may soon find an opportunity to right their capital structures; in turn, making themselves more profitable.

until next time. . .

@The Vertex Team

For information on this update or the funds we offer, please contact your local sales representative:

Noel Dattrino
(Western Canada)
604.408.5660

Michael Lindblad
(GTA & Eastern Ontario)
416.200.4457

James Wilson
(GTA & Western Ontario, Maritime Canada)
519.902.7780