Our economy is in the midst of what some have called the great deleveraging, where excessive debt levels are paid down and Americans recant their spendthrift ways. While some commentators think only of the American consumer when discussing this issue, the great deleveraging also affects corporate America. As part of this process, companies are raising capital in the secondary equity market and using the proceeds to rebalance their capital structure.
IN PICTURES: Eight Ways To Survive A Market Downturn

Deleveraging Benefits
The market typically has a negative knee-jerk reaction to this type of equity issuance, with investors screaming about dilution. However, such actions strengthen the balance sheet and greatly raise the chances of survival for companies that are able to successfully attract capital. The cash received can be used to pay down upcoming short-term debt maturities and thus lower the debt-to-capital ratio, among others.

REITs Raising Capital
Real estate investment trusts (REITs) have taken advantage of the trend in equity capital issuance. Host Hotels & Resorts, Inc (NYSE:HST) has bought into this method and issued 66 million shares of common stock at a price of $6.60 per share. The company had $5.893 billion in total debt as of March 27, 2009, and will use part of the proceeds to reduce some of that debt. Additionally, Vornado (NYSE:VNO) raised $710 million with an offering of 17.25 million shares priced at $43.

A few weeks earlier, it was Duke Realty (NYSE:DRE) doing the same, with an offering of 75.2 million shares (including 9.81 million additional share purchase option) at $ 7.65. The company will use the funds to pay down its balance on its unsecured line of credit.

Other REITs raising equity in April included ProLogis (NYSE:PLD), which issued 175 million new share of common stock, using the offering to reduce debt by $1.2 billion, and Kimco Realty Corporation (NYSE: KIM) which issued 105.2 million shares for net proceeds of $718 million.

Still a Tight Credit Market
It's not really a surprise that companies are turning to the equity market at this juncture. The latest Senior Loan Officer Opinion Survey on Bank Lending Practices for April shows that 65% of respondents tightened their lending standards on commercial real estate (CRE) loans. While this is down from the 80% level in the January survey, it is still elevated and demonstrates the ongoing credit restriction.

Banks have also cut the size of credit lines and raised interest rates and fees for borrowers. Toyota Motor Credit, which is owned by Toyota Motor (NYSE:TM), will have its rate on its 364-day revolver credit line tied to its credit default swap spread. This spread measures the cost of insuring Toyota's debt from default.

Final Thoughts
Consumers aren't the only ones who are deleveraging in response to the restriction in credit availability and drop in cash flows caused by the recession. Many companies are taking advantage of the reopening of long dormant secondary markets and issuing equity to shore up balance sheets. (For an interesting perspective on the credit crisis, take a look at The Bright Side Of The Credit Crisis.)

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Savings

    The Worst Financial Problems Ultra-High-Net-Worth-Individuals (UHNWIs) Face

    Understand how the problems of ultra-high-net-worth individuals (UHNWIs) are different from ordinary problems, and identify the unique financial challenges they face.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center