Capital Markets & Investor Relations

IR Monitor – 14th December 2020

Investor Relations News

This week we begin by discussing the booming market for corporate debt, and how this has led to an increase in ‘corporate hybrids’. We then explore a dilemma faced by companies that have previously taken taxpayers’ cash to pay wages but are now recovering, before examining opposing views in the debate between shareholder capitalism vs stakeholder capitalism. We then turn to the fracturing US trading landscape and how this is muddying understanding of trading activity in the US, before moving on to the uncertain consequences of investors’ increasing appetite for bankrolling companies with healthy post-pandemic prospects. Finally, we look at the Cheesecake Factory – the first public company to be charged by the SEC for misleading Covid risk disclosures.

This week’s news

Funky debt bonanza is breeding complacency

The booming market for funky corporate debt is too successful for its own good, according to Reuters. Low rates and investors’ thirst for yield have prompted companies from Gazprom to BP to issue more bonds that count as equity than ever before. The damage caused by Covid-19 has made issuers more willing to explore ways to bolster their balance sheets rather than tap shareholders, and this means that so-called ‘corporate hybrids’ are having a good crisis. These hybrids are typically viewed by rating agencies as half equity and half debt and will offer at least twice the spread available on a company’s plain vanilla debt. Companies had raised a record €37 billion of them as of mid-November, 58% more than the same period in 2019. Reuters notes that there is a risk that companies are building up liabilities that are more debt-like than they appear, but with rates so low and demand for funky debt high, issuers can probably still afford it.

The great furlough dividend dilemma

Construction giant Balfour Beatty gave shareholders an early Christmas present, announcing that it would resume dividends in March and return a further £50m via a share buyback. The Times reports that at the height of the crisis, Balfour Beatty had 3,000 staff on furlough, and received £15m from the coronavirus job retention scheme to pay their wages. But that was then. Balfour’s trading has recovered from the depths of the first lockdown, all its sites have reopened, its cash pile stands at about £500m and it has been winning contracts aplenty. Although HMRC has made it clear that it welcomes voluntary repayments of furlough cash, there is no requirement for companies to return funds if their finances begin to recover. Rival company CRH has already joined housebuilder Redrow in repaying funds to HMRC. This underlines the dilemma faced by Balfour and other companies that leant on state support this year but are now recovering from the pandemic; reward long-suffering shareholders or appease the public.

Stakeholder Capitalism vs. Shareholder Capitalism: The Debate continues 

Last week the Financial Times and The Wall Street Journal took opposite sides over the merits of stakeholder capitalism versus shareholder capitalism. The Financial Times disputes Milton Friedman’s claim that the social responsibility of business is to increase its profits, stating that 50 years on the doctrine needs re-evaluation as the problems with the  unbalanced economic, social and political power inherent in the current situation are vast. The piece calls for the creation of good rules of the game on competition, labour, the environment and taxation.  The Wall Street Journal takes the opposing view, labelling stakeholder capitalism ‘a vague and open-ended mandate for corporations to do good in the world’ and maintains that it is mostly a front for irresponsible corporatism. It states that profit, by contrast, remains a concrete metric that allows shareholders to hold executives accountable for their performance.

A look at the fracturing US trading landscape

September 2020 saw the launch of three new stock exchanges, bringing the total number of US exchanges to 19. In addition, the SEC continues to approve alternative trading systems – also known as dark pools – with 54 currently in operation in the US. As more trading venues and exchanges launch, it becomes harder to understand where a stock is traded, by whom and what it means for the price and the likely buyer/seller, reports IR Magazine. What’s more, there will be fewer experts who can have a detailed understanding of the entirety of the US market to help IR and corporate finance teams understand trading activity across venues. The new exchanges and trading venues have clear value propositions.  There are half the number of companies in the US markets today that there were 20 years ago, but there is more trading and crucially, the venues make more money.

Companies raise ‘eye-popping’ capital 

This year the world’s non-financial firms have raised an ‘eye-popping’ $3.6trn in capital from public investors, notes The Economist. In a world of near-zero interest rates, it seems that investors are prepared to bankroll any company with a shot at surviving the pandemic. Companies from Carnival Cruise Lines to Boeing have secured huge investments as investors bet that these firms will bounce back post-pandemic. IPOs are also nudging all-time highs, with digital and health startups leading the charge. With shareholder payouts trimmed or suspended until the Covid fog lifts, the cash held by the world’s 3,000 most valuable listed non-financial firms has exploded to $7.6trn, from $5.7trn last year. The Economist notes that capital is likely to keep flowing for now but warns that some of that money will go up in smoke, with the rest bolstering corporate haves and sharpening the contrast between them and the have-nots.

And finally … Cheesecake Factory settles with SEC over misleading Covid risk disclosures, a first for a public company

The Cheesecake Factory has been charged by the SEC for misleading investors about the coronavirus pandemic’s financial impacts, reports CNBC. This is the first time that the regulator has charged a company for misleading investors about the financial impacts of the pandemic. Without admitting to the SEC’s findings, the restaurant company has agreed to pay a $125,000 fine and to not conduct further violations of the reporting provisions of securities laws.


15 December: Asia LNG Tour, Macquarie (Virtual)

15 December: 5G Summit, Oppenheimer (Virtual)

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