On either side of the Atlantic, the stock market has rarely looked less welcoming for publicly quoted companies in need of fresh capital.

HBOS, the retail bank long regarded as one of the safest investments in the UK, went cap-in-hand to its shareholders and asked last week for £4bn ($8bn, €5bn) to bolster its balance sheet. The vast majority said no. Also last week, in New York Merrill Lynch’s sale of assets worth $8bn including its stake in Bloomberg, the financial information provider, was taken by some as a sign that banks were running out of options to raise funds.

That notion was pithily dismissed by John Thain, Merrill chief executive, who remarked that the group’s balance sheet was strong enough that it could still divest assets Wall Street had never even heard of. But after months of falling shares in the financial sector, the investors who helped banks during the first waves of the crisis – sovereign wealth funds and existing shareholders – appear in no mood to stump up more cash.

The most graphic evidence of this came this month when Washington had to prop up Fannie Mae and Freddie Mac, the twin pillars of the US housing market, after the mortgage financing groups’ search for outside saviours was met with a deafening silence.

Earlier this year, it was a different story. In all, Wall Street investment banks have in various ways raised more than $300bn to cover writedowns necessitated by the credit squeeze. The pattern was similar in Europe, helped by a traditionally greater investor acceptance than is found in the US for secondary offerings of new stock targeted at existing shareholders.

In France, Société Générale (after its trading fraud scandal) and Crédit Agricole each tapped shareholders for more than €5bn through rights issues, while UBS of Switzerland raised SFr16bn ($15.6bn, £7.8bn, €9.9bn). The UK climate has changed quickly: when Royal Bank of Scotland raised £12bn in a rights issue that closed last month, it managed a 95 per cent take-up from investors.

So where does that leave companies in need of capital today? “There is an element of market fatigue for financial institution capital increases. Never before has such an amount been raised by one sector in such a short period of time,” says Viswas Raghavan, head of international capital markets at JPMorgan, part of JPMorgan Chase.

If the window is being nudged closed for the banks, what are the capital raising prospects for their quoted corporate customers? “Over time, it has become harder to get deals done. Investors are more selective than they were and are looking at whether there is a compelling rationale for the transaction,” says Matthew Koder, joint head of global capital markets at UBS. “Large-cap, well-known companies are fine but for smaller companies it will become more difficult.”


Highly indebted non-financial companies, in particular those that have been floated by private equity, are being treated warily, say bankers. Also out of investor favour are those in sectors that rely on consumer confidence, such as property groups and retailers.

Yet there is another part to their predicament. The worst thing that troubled companies can do now, bankers warn, is sit on their hands and wait. If a management thinks that hedge funds will in coming months have any reason to sell the company’s stock short and try to drive the share price lower, now might be the time to head them off at the pass.

If management teams want to raise money, they should first think about asset sales – and line up any potential buyers, bankers say. Renegotiating debt covenants would also make equity investors more comfortable about putting their hands in their pockets. “There is more reluctance on the street to hand over money simply for capital (and working capital) requirements. Companies must have a much broader plan,” says Duncan Smith, head of European equity syndicate execution at Lehman Brothers.

Sovereign wealth funds and other investment entities with strong links to emerging market governments may feel sated by the amount of western bank shares they have lately accumulated. But they are still thought ready to put capital to work.

Those sovereign funds that are looking for the kind of returns that private equity has been able to generate in the past may fund companies that specialise in restructuring distressed companies, rather than buying outright stakes in distressed corporate groups, says George Hoguet, investment strategist at State Street Global Advisors. “Many sovereign wealth funds have expressed interest in getting private equity-type returns,” he adds.

Moreover, sizeable takeovers by such funds may still be seen. “As in the last recession, we will see a very small number of very large strategic investments. Sovereign wealth funds are already active,” says Rupert Hume-Kendall, global chairman of equity capital markets at Merrill Lynch.

Private equity itself may be able to step into the breach to fund the restructuring of smaller companies that are beneath the notice of the sovereign funds. “Private equity has a role to play. It is a highly liquid industry and it has to put that capital to work somewhere, given that its normal funding channels have got difficult,” Mr Hume-Kendall adds.

For some companies with an adequate credit standing, raising money through a corporate bond issue that is convertible into equity at a fixed price may be a more attractive option than heading straight for a volatile equity market. But in a worsening economic environment, not all will be able to make a strong enough case, whichever of the various means a company chooses to seek fresh funding. “If you are asking the market for equity capital, investors need to believe at a minimum that your business is sustainable as a going concern,” says Craig Coben, Merrill’s managing director of European equity capital markets.

Companies in trouble will in at least some cases become targets for their stronger and less heavily geared brethren, which should still have relatively few problems in raising cash from their shareholders to fund well-planned acquisitions. Bankers say this could be the beginning of a wave of share issues to fund such purchases. “The market is flush with cash. If the story is good, companies will have no problem raising capital,” says JPMorgan’s Mr Raghavan.

Indeed, at least in the US where the subprime loans problem originated, a merry-go-round of takeovers could be around the corner for the banks themselves. “It is only a matter of time,” says a senior Wall Street dealmaker. “Within six to nine months we will see an explosion in merger activity among financials.”

Additional reporting by Francesco Guerrera

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