27 April 2009

Surge in secondary offers threatens stocks' advance

NEW YORK (Reuters) - Companies seeking to repair their balance sheets are swamping investors with tens of billions of dollars in equity offerings that threaten to put a lid on recent gains in global stock markets.

Since January 1, investors have been tapped for $109 billion worldwide in secondary share sales -- or 37 percent more than at this point last year, according to Thomson Reuters data.

Analysts expect that pace to continue this year as companies, particularly banks and other financial firms, desperately seek to shore up their capital after the destruction wrought by the financial crisis.

The International Monetary Fund estimated on Tuesday that banks would need to raise $875 billion of fresh capital.

Companies may find a cool reception.

"It will be dilutive for common stockholders no matter what," said Matt McCormick, a portfolio manager with Bahl & Gaynor Investment Counsel in Cincinnati.

"'Stock by stock' dilution will likely have a cumulative impact on the broad market," McCormick added.

Any slowing of the market could be exacerbated if banks sell new shares because the government forces them to raise money, said Marc Pado, U.S. market strategist with Cantor Fitzgerald.

"The secondaries could slow the market in the mid-term, especially if the money is raised because banks failed their stress test," Pado said, referring to various simulations being conducted by the U.S. government to see how the 19 largest U.S. banks would hold up if the recession persisted and possibly deepened.

Under the best circumstances, a secondary issuance can depress a stock.

Last week, shares of Goldman Sachs Group (GS.N) fell nearly 12 percent a day after the investment bank said it would sell shares to raise $5 billion, in part to reimburse the U.S. government for money received through the Troubled Asset Relief Program.


The results of the stress tests, set to be made public May 4, will likely determine the flow of secondary offerings.

"It'll only be after the results of the banks' stress tests are public that we may see some further recapitalization in the financial industry -- either as a necessity after the stress tests or as some look to repay TARP," said Jeff Bunzel, managing director for equity capital markets at Credit Suisse.

Banks deemed to have an insufficient capital cushion might have little choice but to seek more money from the government or sell additional shares to investors, who may only snap up shares if they are priced low.

"We think there's no hurry to jump into these offerings," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion.

And the going could be particularly tough for banks that fail their stress test.

"If you fail that stress test, no one is going to touch you," said Brad Hintz, a banking analyst with Sanford C. Bernstein & Co. After the collapse of banking stocks in the last year, many investors are wary, he said.

Banks aren't alone in trying to replenish their coffers.

While the largest secondary this year was a $19.4 billion deal by UK-based bank HSBC Holdings (HSBA.L), companies in other sectors have sold billions of dollars in new shares too.

For example, Swiss metals concern Xstrata PLC (XTA.L) sold $5.8 billion of new shares, and Australian conglomerate Wesfarmers Ltd (WES.AX) raised $3 billion in a secondary offering.

A major challenge to the market's recovery could come from the number of shares some companies, especially banks, will need to sell to raise money.

That resulting dilution could prompt short sellers to pummel the shares even more.

"If you are a short seller and think someone will do a dilutive secondary, why wouldn't you short them," McCormick said.

Either way, banks in particular may have to settle for lower prices.

"There's more money that needs to be raised than people expect, and the terms may not be as favorable as the banks would like," McCormick said.

(Additional reporting by Jennifer Ablan; Editing by Steve Orlofsky)


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