IPO Market Sluggish In 2016

With less than two weeks left in the year, it appears that 2016 will be a slow year for IPOs. Only 105 companies went public in the U.S., raising $18.8 billion, while 2015 had 170 IPOs that raised about $30 billion. The amount raised in 2016 was the lowest dollar amount raised since 2003. One potential reason for the slow IPO market is that many privately held companies have reached lofty valuations, with a growing number of unicorns and decacorns. A recent report argues that many of these private companies have lofty valuations that are not supported by public markets. If this is the case, the only way for investors in these companies to cash out with an IPO is by venture capitalists taking a potential loss on the IPO or waiting until the public stock market feels the valuation is in line with the company value.

Share Repurchases Decline

Even though companies in the S&P 500 repurchased $115.6 billion in stock during the third quarter, this actually represented a decline of 28 percent from the third quarter of 2015 and was the smallest quarterly repurchase since the first quarter of 2013. Apple led the way, repurchasing $7.2 billion of its stock, while General Electric repurchased $4.3 billion of its stock. The top sector for buybacks was IT, with $27 billion in repurchases, while the financials sector spent $25 billion on buybacks.

Dollar Strengthens

With housing starts at a the highest point in nine years and the weekly jobless claims reaching a 43-year low, it appears that the U.S. economy is strengthening. As a result, it now appears likely that the Federal Reserve will increase interest rates in its December 13-14 meeting. This also lead to a stronger U.S. dollar as the dollar reached a 13 1/2 year high against a basket of six major currencies. The U.S. dollar reached its highest level against the euro in almost a year, and its highest level against the yen since early June.

Fewer Negative Bonds

As signs for a more expansionary U.S. monetary increase, the market value of negative yield bonds worldwide fell this week. Since June, the market value of negative yield bonds in the Bloomberg Global Aggregate Index has fallen 28 percent from the peak value of $12.2 trillion. An expansionary monetary policy will likely lead to higher interest rates and a steeper yield curve, at least in the short term. Japan is still the leader in negative yield debt, accounting for 58 percent of worldwide negative yielding debt.

Financial Distress Costs For Sears

For several years, the performance of Sears Holdings has been declining. Now, it appears that the company's suppliers feel that the company may be headed toward bankruptcy. JAKKS Pacific announced last month that it would stop shipping toys to Sears' Kmart stores, fearing Sears would file bankruptcy, making collection on the receivables problematic. Now it appears that other suppliers have reached the same conclusion as at least six suppliers have reduced shipments to Sears for the same reason, including at least one supplier who stopped shipping to Sears entirely. Chairman and CEO Eddie Lampert had extended credit to Sears three months ago to stop speculation by suppliers and some Sears suppliers have been paid in 30 days rather the typical 60 to 90 days. Given that Sears is headed into the Christmas season, the biggest sales season for retailers, problems with suppliers could signal a spiral into bankruptcy for the company.

Record Treasury Bill Sales

The U.S. Treasury Department sold a record $65 billion in one-month Treasury bills at an interest rate of .27 percent. Even with the record dollar sales, the bid-to-cover ratio, that is the ratio of bids to available bonds, was only 3.39, which is the lowest level since March.

Bond Call Provisions

A callable bond is typically only callable on the anniversary date of the bond or coupon date. However, this is not a requirement as the bond indenture is an individual contract specific to that particular bond issue. A common reason bonds are issued is to finance the acquisition of another company. These bonds are generally callable if the deal falls through and the call price is often set at 101 percent of par. Bondholders can be hurt by this fixed price call provision as bond prices can rise in the intervening period between bond issue and the deal being terminated. For example, when Sysco’s bid to buy US Foods  feel through last year, bondholders lost $309 million as the bonds were called at 101, well below current market price, which had reached as high as 113.3. Now, major bondholders are pushing to change the call value of bonds issued to fund acquisitions to a make-whole call premium, which commonly used for bonds issued for purposes other than acquisitions.