Capital raising by ASX-listed companies has hit a decade low, according to analysis by Credit Suisse.
Over the past 10 years, Australian-listed companies issued net new equity capital of about $40 billion per year.
“This has helped create jobs, supported our economy’s solid momentum, and facilitated the development of new products,” write analysts Hasan Tevfik and Peter Liu in a note to clients.
“This year, net equity supply has totaled a dismal $1 billion. 2017 is shaping up to be the weakest year for net equity raisings in over a decade.”
Here’s how the equity raisings have shrunk:
The credit market with record low interest rates, is currently the most competitive form of corporate capital.
The cost of debt for the average Australian company is about 3% and the free cash flow from a company is about 5%.
“Issue debt at three, buy equities at five seems like a great trade,” the analysts write. “Perhaps this unusually large arbitrage opportunity between debt and equity is the reason why private equity continues to linger around our market.”
It is not only private equity taking advantage of the capital arbitrage. There are currently 17 companies listed on the ASX200 undertaking share buybacks.
“We should not be surprised by the large debt for equity swaps that have occurred so far this year,” the analysts write. “This has come in the form of slated IPOs that have gone to cash/debt financed buyers, continued private equity interest in our market and buybacks.”
They say the potential EPS accretion from a buyback is currently unusually high, which bodes well for future equity market returns.
The analysts say this current reporting period has traditionally been a time when buybacks are announced.
“We believe the backdrop is set for more than usual this time around,” they write. “Potential buybackers from here include Qantas, BHP, Computershare and Lend Lease.”
Another headwind for equitisation in Australia can be attributed to the lack of IPOs this year. Not many new companies are being publicly listed.
“At the start of the year, bankers were getting excited about the possibility of a big utility IPO—Alinta,” the analysts write “That could have come onto our market at more than $4 billion. But it wasn’t to be. Instead, Alinta was sold to Chow Tai Fook who financed the purchase with debt and cash.”