Why would a company want to have 100% Equity Financing in their Capital Structure?
Hey everyone I am looking into a company the basic materials sector (Chemical manufacturer) which has the previously mentioned desired Capital Structure. Currently, they have like 5% of their CS with Convertible bonds but they are planing to repay them and continue without debt. What could be the reasons behind this strategy? Context: They extract their raw materials and refine them into compounds
Either or all of the below?
1. They hate the current cost of debt being offered
2. You mention convertible bonds - i really doubt they can do a syndicated deal or the likes of anything to do with traditional bank debt since the risk/reward profiles between both are vastly different
3. They’re unable to attract sufficient lender interest (reasons could range from lack of proper internal governance to geopolitical issues - a lot of other considerations go into raising bank debt other than the cost of capital)
4. They have friends/political connections who could offer equity at better terms than the wider market
I strongly believe that the convertibles were offered among current shareholders.
Something like 50% of the convertible bond market right now is high vol, high cash burn tech names that issued in 20 and 21. You’ll see lots of 0% or sub 1% coupons up 30 or 40% that are now trading in the 50s, 60s, and 70s as their stocks have come back to earth AND rates have skyrocketed since ZIRP.
Thing is, those issuers, assuming they are still cash burning, only have one option - refi and issue new convert. Can’t pay the principal if burning cash (sure can do a follow on to pay down but eh), investors cant convert since the bonds are OTM, and cash burning biz challenging to access the corporate debt market to refi the convert.
Interesting timeline equity-linked…
only explanation is that the CFO missed the uni class on Modigliani theorem
Maybe it's the fact they're dealing with commodities? Your description doesn't fit the bill, but a mining/oil company probably would. Adding debt basically adds leverage and when you're dealing with a cyclical commodity you already have plenty of leverage. Maybe they believe adding leverage on top of the cyclicality would be too risky.
They extract their own raw materials but the core business is the refined product
Allows for flexibility esp during volatile times like now
Reduced leverage makes a company more resilient during times of distress
Not sure if this company’s financial performance, but their poor performance may mean that lenders don’t view the company as a good credit, and this they may not have access to the debt capital markets.
Alternatively, if the company produces significant levels of free cash flow but has limited opportunities to invest it, they may decide that they are better off bootstrapping rather than taking on debt with no place to deploy it. In that case, the proceeds from the raise may be distributed via dividend, but they may not want to execute a dividend recap right now
I mean theoretically they want to have no short term obligations (no interest/principle payments to pay for debt) so they can invest in long term projects. That or they got one hell of a deal on preferred/other equity instrument financing
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