Corporate Forecast: Debt Out, Equity In
With corporations deleveraging their balance sheets, bankers will spend much of next year re-financing existing debt instead of providing fresh credit.
Refinancing activity in 1991 stemmed in part from so-called reverse leveraged buyouts, and bankers hope to see more of the same in 1992.
In addition to the new fees that come with the business, the payoff for the banks is that their customers often become much higher-quality credits as a result of these re-financings, which are accompanied by fresh infusions of equity.
"To the extent the stock market does not change materially in a downward direction, I think you will see a steady stream of these deals," predicted James Lee, a managing director at Chemical Banking Corp.
This year, Chemical has led a number of refinancings for reverse LBOs, including those of Interstate Bakeries Corp. and York International Corp.
In reverse LBOs, companies use the proceeds from an initial public offering of stock to retire high-cost junk bonds issued to finance the original buyout. Often, new bank loans also are obtained to refinance existing buyout-related bank debt and junk bonds.
A number of companies are still waiting in the wings, hoping to tap the equity markets next year. Many of these companies will also be refinancing their bank debt as part of a major overhaul of their balance sheets.
The 1992 Lineup
"There are still some deals out there that need to be fixed, but it's starting to wind down," said Joseph Rizzi, a vice president at ABN Amro Bank in Chicago.
Burlington Industries, for example, hopes to go public again next year. Taken private in 1987 by an investor group led by Morgan Stanley & Co., the Greensboro, N.C., textile concern wants to raise more than $1 billion in new financing from both the equity and bank loan markets to replace high-cost buyout-related debt.
Also hoping to jump on the deleveraging bandwagon next year is Coltec Industries Inc., a diversified maker of aerospace, automotive, and industrial products that was taken private in the late 1980s by Morgan Stanley & Co.
It remains to be seen, though, whether the equity markets will accommodate these companies. After a spate of such deals, the market has cooled in the past few months.
"If you flood the market with anything, you wind up meeting resistance from buyers," said Charles Kiley, a managing director at Bankers Trust New York Corp.
"Reverse LBOs are not in favor now, and they probably won't be until the economy picks up steam," said Robert Natale, a vice president in the equity services unit of Standard & Poor's Corp.
However, if attempts to resuscitate the economy are successful, the market for initial public offerings in general - not just those involving reverse LBOs - "should do fairly well" throughout 1992, Mr. Natale added.
The Surge of '91
Indeed, he said 1992 could be as strong as 1991.
From Jan. 1 though Dec. 23 of this year, 359 companies raised a total of $15.8 billion in initial public offerings, or IPOs, according to Securities Data Corp.
In 1990, by comparison, 172 companies raised just $4.5 billion. However, activity virtually came to a halt in August of that year, following Iraq's invasion of Kuwait.
"Obviously, the IPO market has brought forth a number of deals" for banks, said Michael Murray, executive vice president for corporate finance at Continental Bank Corp. in Chicago.
As a result, Continental's own backlog of deals appears to be better now than this time last year, Mr. Murray said.
Appetite for Second Helpings
Apart from IPO-related deal flow, a number of big borrowers are expected to be coming back to their banks in 1992 to refinance their debt.
Uppermost on many bankers minds is the likely refinancing of Time Warner's $9 billion of bank debt, in conjunction with a major equity infusion from outside Japanese investors.
"We'll probably see some interesting activity in the first three months of next year," said Richard Clapp, senior vice president in Sumitomo Bank Ltd.'s New York office.
New lending opportunities may also arise next year, as corporations restructure, and seek to sell off nonstrategic businesses and subsidiaries.
Continental's Mr. Murray expects such activity to provide a "major source of deal flow" going forward, as banks step up to help finance these transactions.
"We see it in large corporations, and even middle size companies that have ended up with more of a mixed line of business than they wish to have," he said.
Meanwhile, corporate borrowers will be returning this year to renew the growing number of 364-day backup facilities that were put in place during 1991.
"There will be a lot of rolling going on," Chemical's Mr. Lee said.