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.
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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.)



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Tickers in this Article: VNO, DRE, HST, PLD, KIM, TM

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