The fourth-quarter stock market rout that wiped out $12 trillion in shareholder value and sparked a bout of Christmas Eve panic may have quickly been forgotten by most Americans, but not by the salespeople and financial engineers of Wall Street.
No, the selloff, it would appear, wound up triggering fears that time was running out on the longest bull market in history. And so, when early 2019 delivered a miraculous rebound, they wasted no time in peddling all sorts of deals and arrangements that test the limits of risk tolerance: from health-food makers fast-tracked into public hands to stretched retailers wrung for billions by private equity owners in the debt market.
Junk bonds are flying out the door once again. Deeply indebted companies are borrowing even more to pay equity holders. And while you can’t say the megadeal IPOs got rushed to market, two that were held up as heralding a return to IPO glory days have been flops. It’s quickly turning Uber and Lyft into poster children for Wall Street eagerness amid an equity-market bounce that has all but banished memories of the worst fourth quarter in a decade.
“At some point, people are going to get burned,” said Marshall Front, the chief investment officer at Front Barnett Associates and 56-year Wall Street veteran. “People want to take their companies public because they don’t know what the next years hold, and there are people who think we’re close to the end of the cycle. If you’re an investment banker, what do you do? You keep dancing until the music stops.”
Bankers who in October suggested a $120 billion valuation for Uber Technologies Inc. have eaten their words, with the market cap falling to half that. Rival Lyft Inc. closed its first day in March with a $25 billion valuation that was higher than all but about 275 U.S. companies. It’s since fallen by a third. The timing of the IPOs only serves to further stoke the suspicions of those Wall Street observers who see a plot to transfer a private-market bubble into public hands.
JPMorgan, which ran Lyft’s debut, declined to comment, while Morgan Stanley, lead underwriter for Uber, didn’t respond to telephone and emailed requests for comment.
After 2018’s traumas, credit markets have also reversed much of the carnage and rallied, giving license for companies to pick up the pace of borrowing. Junk bond issuance is now ahead of last year’s pace, according to data compiled by Bloomberg. Last week alone saw $12 billion priced, the busiest in 20 months. Investment-grade issuance, though down from a year ago, is gaining steam, with back-to-back jumbo offerings this month from Bristol-Myers Squibb Co. and International Business Machines Corp., each around $20 billion.
Private equity firms have also taken advantage of benign credit conditions to cut risk and realize gains sooner. They’ve saddled the companies they invest in with more debt to pay themselves dividends. Issuance of leveraged loans for distributions to equity holders reached the highest in six months in April, according to data compiled by Bloomberg.
Sycamore Partners, a private equity firm know for aggressive bets in the retail sector, pulled a staggering $1 billion out of Staples Inc. last month through a recapitalization that increased the company’s interest expense by $130 million annually. A few weeks later, Hellman & Friedman and Carlyle sold one of the riskiest types of junk bonds from drug research company Pharmaceutical Product Development LLC to help pay for a $1.1 billion dividend. The bond, which allows the company to delay interest payments, was the largest of its kind since 2017.
Concessions Lacking