Waiting for Stability

Open the door just a wee bit more …


A sentiment echoed by the plethora of companies waiting to test the IPO market. In the unstable markets of the last nine months, we have seen almost no equity IPOs but that may change very soon. We have already witnessed the first step, companies testing the bond market with what we call ‘refi’s’ (refinancings). This is the first step to market stability, a canary in the coal mine if you will. Of course, as you might have heard, the first real test of the IPO market this year may be Facebook.

Go Giants! (sorry, we’ve got a NY Giants fan in the room excited for Sunday). He meant: “Go Facebook!”

With a nine month backup in IPOs, we could have a veritable run on new issues coming down the pipe. There are many companies that have filed IPO documents but are waiting for the right opportunity; a jolt of confidence. Facebook may be the first one through the door and provide just the spark that CEOs and investors alike have been waiting for. There will be a lot of hype around this event, on the scale of Google’s IPO.

Now why we are excited by this? We don’t currently own any Facebook but we do own a slew of bonds by companies without publicly traded common equity, who would like to optimize their capital structure. Equity IPOs provide companies’ the opportunity to right size their capital structure and lower leverage. Most of these bonds have indentures that allow the repurchase of up to 35% of the issue, in the event of an equity offering.

We purchased these bonds on their own standing, liking the leverage levels, earnings power and risk/reward but now if any of these bonds IPO equity, we’ll get a double win. The IPO and subsequent repurchase is a huge deleveraging event which makes our bonds more secure. The risk/reward profile goes up as does the probability of a ratings agency upgrade due to the deleveraging. Furthermore, the kicker here is that most of these indentures provide for repurchase at a premium-to-par.

We hear talk of a number of our bond positions testing the IPO market over the next 6 months if the market conditions allow.

Can Facebook lead the way? It’s possible. Whatever the catalyst is there’s no denying the pent-up demand to IPO will eventually bust through the door. We certainly will be watching closely…

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)

Michael Lindblad
(GTA & Eastern Ontario)

James Wilson
(GTA & Western Ontario, Maritime Canada)