Increases in initial public offerings would normally benefit banks, but a recent surge in IPO activity is instead threatening to further shrink lenders' balance sheets.

IPOs during boom markets often create lending opportunities, as freshly funded companies look for loans to put the capital to use. Coming off a recession and a sluggish recovery, however, businesses now are using newly raised capital to deleverage.

"It follows the same advice we give consumers; it's better to pay down debt when we can save on interest expense," said Bruce Zanca, the chief communications officer at Bankrate Inc. in Fort Lauderdale, Fla.

Bankrate went public on June 17, raising $300 million that it mostly used to pay off debt it had incurred making acquisitions. Compressco Partners LP, an oil and gas product manufacturer in Oklahoma City, also plans to use funds from a scheduled $53 million IPO to retire debt.

At June 27, U.S. companies had raised $24.3 billion through 79 IPOs, the highest midyear totals since 2008, according to data from PricewaterhouseCoopers LP.

Industry observers said that such an increase may be good news for investment banks, but worrisome for banking companies that are already struggling to find a suitable amount of commercial and industrial loans.

"The level of payoffs has been significantly higher in the last six months," said Gideon Haymaker, the chief executive of Seaside National Bank and Trust in Orlando, Fla.

The $705 million-asset bank increased its commercial and industrial loans over the past year by more than 50%, to $211 million at March 31. Haymaker said the recent spike in IPOs could tamp down growth for banks specializing in C&I loans.

With more IPO filings in the pipeline, more loans are likely to roll off the books of commercial-focused banks at least for the remainder of the year.

"It's reasonable that we'll see an upward trend [in initial public offerings] in the next quarter," Henri Leveque, leader of the capital markets and accounting advisory practice at PricewaterhouseCoopers, said in an interview.

Leveque said that at least 77 other companies have filed registration statements outlining plans to go public. Those initial public offerings represent the biggest pipeline since the second quarter of 2007, when there were 79 IPOs lined up.

Roughly a quarter of the 47 IPOs that were completed in the second quarter involved technology companies, accounting for about 37% of the volume, according to the report from PricewaterhouseCoopers, which was released June 29. Business services made up 20% of the IPOs, but only 16% of the volume.

(There were also seven IPOs filed by financial services companies during the second quarter, raising $1.1 billion.)

Activity in the second quarter rose 47% from the first quarter and 15% from a year earlier, the report said.

Leveque said many of those companies leveraged debt, particularly for acquisitions, when interest rates were higher in the last spike in IPO activity. Companies are finding that IPO pricing is cheaper than the pricing they're paying on debt, making it more attractive to go public.

(Normally, debt is regarded as having a lower cost of capital compared to equity.)

Zanca said that investors are also encouraged to invest in companies with reduced debt leverage. Zanca said that Bankrate's credit rating improved immediately after the company said it would pay off debt with proceeds from its initial public offering.

"When someone is looking at a prospective investment, it's nice know they are not going into a company with debt," said Craig Miller, a partner and the co-chair of the financial services and banking group at Manatt, Phelps & Phillips. If a company files for bankruptcy protection, senior and subordinated debtholders get paid before shareholders, who often are left with nothing.

A company's decision on using proceeds from a public offering varies depending on its sector and maturity. Leveque said that smaller companies raising $300 million to $500 million in capital, for instance, tend to use the funds more to "shore up" balance sheets.

Industry observers believe that, while paydowns on outstanding debt are higher over the short term, companies going public will eventually need credit as they prepare to expand.

"We definitely see these companies paying off debt, but that doesn't mean they're ending their commercial banking relationship forever," Miller said.

Miller said he has a client that recently switched banks to receive a lower rate on a $20 million line of credit even though the company has no immediate plans to tap the line. The company is likely to find a use for the line over time, he said.

(Bankers, meanwhile, have struggled since the recession with low utilization rates for credit lines.)

"Most company shareholders don't see [credit] lines as a negative, they just see it as another source of liquidity," Miller said. "With today's low interest rate environment, you will inevitably see companies tap the debt markets."

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