After the end of the loose currency era, current borrowing costs are much higher, so corporate management currently believes that reducing leverage through equity financing is a good choice.

For example, Metals Acquisition (MTAL.US) purchased a copper mine in Australia from Glencore with an advance payment of nearly $900 million in 2023, and the company turned to the bond market to finance the acquisition; now, the company decided to lower its debt leverage and decide to raise capital by issuing shares in the listed US stock market, but in the end, demand from Australian investors was so high that it eventually raised around 325 million Australian dollars (US$216 million). Morne Engelbrecht, the company's chief financial officer, said in an interview that “the stock market cheered on copper stocks” after the rise in copper prices. Engelbrecht said, “I removed those high interest-bearing liabilities, and we still have the opportunity to raise more share capital in the future. “This depends on the performance of the stock price.”

After tight monetary policies made equity financing more attractive, it wasn't just listed companies like Metals Acquisition that turned to the stock market to ease the burden. Moreover, more and more companies are using lower leverage ratios as an incentive to go public. According to the data, in the year ending April of this year, the company completed an initial public offering (IPO) of 28.5 billion US dollars, of which funds used to repay debts are listed as one of the uses of financing proceeds. That's a 56% increase over the previous 12 months.

Evgenia Molotova, senior investment manager at Swiss Patek Asset Management Ltd., said: “The rise in borrowing costs is beginning to have an impact. Due to the high level of uncertainty in interest rates, it makes sense to use the IPO market as the IPO market opens, although valuations are far from reaching the active level of 0% interest rates during the COVID-19 pandemic.”

The soaring stock market is beneficial to equity financing, and high interest rates make debt expensive

George Maris, chief investment officer of the global stock market at asset management company Principal Asset Management, said that the strength of the stock market means that currently eliminating leverage by increasing stock holdings is not a bad thing. The S&P 500 surged about 28% over the past year, and the European Stoxx 600 index rose more than 12% over the same period.

Although debt-driven initial public offerings (IPOs) are increasingly becoming a trend, bankers expect more listed companies will seek to place shares. So far, however, cheap loans reached during the pandemic have limited the need for listed companies to take advantage of the open market. In the four months up to April of this year, they have raised nearly $20 billion by selling shares, an increase of only 4.5% over the same period last year.

Tom Snowball, head of the UK equity capital markets business at BNP Paribas, said: “Frankly speaking, we haven't seen the level of issuance we might have anticipated. If interest rates continue to be cut, do companies need to switch to stocks? That remains to be seen.”

Once in the market, quality companies will find investors willing to invest, some of whom are frustrated by the lack of investment options. Barclays data shows that in Europe, lack of primary market activity and increased repurchases mean that the number of shares is shrinking at the fastest rate in 20 years.

Luc Mouzon, head of equity capital markets at Amundi Asset Management, said: “Companies cannot expect us to pay for their ability to lower interest rates through public listing, but in other words, not all debts are the same. We prefer IPO candidates that have growth or merger-related debt on their balance sheets rather than those whose leverage is so high that free cash flow is swallowed up by debt repayment.”

Asset managers say investors are very picky about transactions because they don't want to directly fund the company's capital restructuring through an IPO, and they will ask companies that try to provide discounts.

In order to reduce debt, private equity was sold to recover funds

This is a potential problem for private equity firms, which provide companies with large amounts of cheap debt at a time when borrowing costs are lower. In some cases, they even added more leverage to the business last year because they expect valuations to be boosted by a series of unrealized interest rate cuts.

Nicole Kornitzer, portfolio manager at Kornitzer Capital Management, said: “As interest rates remain high for longer, debt repayment settlement is imminent. Private equity needs to recover capital, so they will have to consider an IPO.”

Back at Metals Acquisition, Engelbrecht paid some interest-bearing liabilities through the proceeds of the Australian listing. He is currently studying various options for the company's mezzanine debt, including incorporating it into advanced arrangements. The company currently has no plans to raise more capital by selling shares. Engelbrecht said, “We are a highly leveraged company. Now that you have an asset that generates significant cash flow, we can inject significant equity into the business, repay some of our debts, and create more value for shareholders.”

Mergers and acquisitions require debt reduction

Meanwhile, brokerage firm La Rosa Holdings (LRHC.US) used its October IPO to repay most of its loans, clearing the way for it to trade. Joe La Rosa, CEO of the company, said in an interview: “The listing has enabled us to go out and are very active in mergers and acquisitions, which is why we have carried out 10 acquisitions since the IPO; as a private company, we are facing great challenges and are unable to obtain some of these financing.”

Jim Peters, chief financial officer of household appliance manufacturer Whirlpool (WHR.US), said in an interview that if major acquisitions are to be made, they may consider financing through the stock market, but mergers and acquisitions are currently not a priority. He said the company sold part of its Indian subsidiary earlier this year, in part because its valuation made it an attractive part of the group's debt reduction strategy. He also said that the company has no plans to further reduce its holdings by 51%.

Thomas Martin, senior portfolio manager at GLOBALT Investments, pointed out that one benefit of reducing debt by selling shares is that it can improve the company's earnings per share performance. The company manages around $3 billion in assets. He said, “Companies that wait for interest rates to fall back so they can refinance their debts in this way won't be in this situation for a long time. They had no choice but to address the risk on their balance sheet by issuing additional shares. When the market is strong, now is a good time to do that.”