A STOCK market fire sale at the cheapest prices in 13 years is burning investors as companies turn away from the highest credit costs in more than a decade.
Corporations in the United States and Europe must repay US$1 trillion in debt maturing this year, the most since 2000, data compiled by New York-based Citigroup Inc show.
Bloomberg News reported that, as the cost of borrowing for investment-grade companies climbed to 2.35 percentage points above government debt in the past year, firms such as Wachovia Corp, Wesfarmers Ltd and Imperial Energy Plc are selling shares for an average 14.7 times profit. That's the lowest since at least 1995.
"Companies won't be getting for their shares what they would have expected months ago," said Sandro Baechli, 30, a Zurich-based equity strategist at Clariden Leu, which oversees US$128 billion. "Debt markets are not welcoming. Companies that desperately need the cash will have to undergo a fire sale."
The cost of borrowing for companies with credit ratings between AAA and BBB- at Standard & Poor's, which averaged 0.86 percentage point above government debt during the last five years, has since surged to the highest since at least 1997, data compiled by Merrill Lynch & Co show. The credit-market collapse that triggered more than US$260 billion in banks' losses and extinguished demand for everything from commercial paper to securitized debt precipitated the jump.
Yield narrowed
Businesses have sacrificed shareholders as the cost of paying dividends decreased to a six-year low versus interest on bonds. The difference between the extra yield investors demand to buy investment-grade bonds from companies tracked by New York-based Merrill and the dividend yield of stocks in the MSCI World Index narrowed to 0.4 percentage point this month, from 1.42 points a year ago.
The MSCI World added 0.8 percent in London.
The last time paying dividends cost the same as bond interest was in December 2000, preceding an increase in new shares issued in the following 12 months, data compiled by Bloomberg show.
The same increase now would put almost US$800 billion of new equity in global markets in the next 12 months as cash-strapped companies tap investors to repay debt and fund operations.
The potential fundraising would exceed the amount companies have raised in each calendar year via share sales since at least 1999, according to Bloomberg data. "They're raising capital from anywhere they can," said Jennifer Ellison, a principal at Bingham, Osborn & Scarborough, which manages US$2 billion in San Francisco.
"We're seeing a big transition in the balance sheets of these companies. It's the existing shareholders who are really paying the price."
After the worst quarterly decline in the MSCI World Index since 2002, investors are less willing to risk money on corporate earnings than at any time since at least 1995, measured by the gauge's price-earnings ratio. Investors paid an average of US$14.71 for every dollar of earnings generated by the 1,940 companies included in the stock benchmark last month. A year earlier, investors paid US$17.09 per dollar of profit.
That may force companies to sell larger stakes to make up for financing shortfalls. Banks and brokerages, whose balance sheets have been the hardest hit by credit market losses, have raised or announced plans to seek at least US$163 billion in capital since July.
Wachovia, the fourth-largest US bank, said last week it will sell US$8 billion common and preferred stock to its largest holders after unexpectedly losing US$393 million in the first quarter.