Commercial Paper Issuance Falls

In March 2016, an average of 95 AA-rated companies issued commercial paper per day. On March 29, 2017, only six such companies issued commercial paper. The reason behind the dramatic decline in commercial paper issuance is regulations enacted by the SEC to reduce risk in money market mutual funds. Historically, all money market funds had a net asset value (NAV) per share of $1. If the NAV dropped below $1, it was known as "breaking the buck" and had only occurred a limited number of times. In 2008, the Reserve Primary Fund became the largest money market fund to break the buck. In an attempt to reduce risk, the SEC changed the rules for institutional money market funds that means the NAV of these funds will not be pegged at $1. The result was a flight from institutional money market funds, reducing the availability of these funds as customers of commercial paper. This has made it more difficult for companies to raise short-term debt.

Loonie Taking Flight?

Since 2012, when the Canadian loonie reached parity with the U.S. dollar, the currency has taken a nose dive, dropping to a low of C$1.46 in early 2016. One benefit for Canada is that the cheap loonie created a trade advantage, helping that country's exports and benefiting the economy. With a better economy, whether the loonie will once again take flight is an important consideration for U.S. companies doing business in Canada. Strengthening of the loonie will increase the cost of goods imported to the U.S. from Canada, thereby reducing profits. These companies can lock in costs with forward contracts for commodities, or by hedging currency risk with futures, options, or swaps.

IPO Market Up

During the first quarter of 2017, 25 companies went public, raising $9.9 billion, the highest amount raised in the quarter over the past three years. Snap was the largest IPO in the quarter, raising $3.4 billion. There are currently 62 companies in the pipeline. These companies are expecting to raise $17 billion, a relatively thin pipeline.

Snapchat's Disappearing Votes

When Alphabet (parent company of Facebook) Google and Facebook went public, the founders of each, Sergey Brin and Larry Page and Mark Zuckerberg, wanted to maintain control of their respective companies. To accomplish, they created Class A shares, which have one vote and were sold to the public, and Class B shares, which have 10 votes per share. This effectively allowed the founders to control all decisions made by the company. One drawback is that as the companies grew and needed to issue more shares for employee stock options and acquisitions, the number of A shares grew, diluting control of the companies. Now, Snap, the parent of disappearing message app Snapchat, is planning an IPO and it appears that the company is going even further: It has been reported that the IPO will offer shares with no voting rights. All voting shares will be retained by the co-founders Evan Speigel and Bobby Murphy, who will retain 70 percent of the votes in the company.

The (Partial) Effects Of Tax Reform

With the U.S. corporate tax rate being among the highest among developed economies, there is discussion of corporate tax reform that would reduce the corporate tax rate from 35 percent to 20 percent, as well as the possibility of eliminating the deduction of interest expense entirely. So how would this affect corporate finance? A cut in the corporate tax rate on interest would reduce the attractiveness of debt as a form of financing, thereby reducing the amount of debt in the optimal corporate capital structure. One estimate is that the U.S. average debt-to-EBITDA ratio would drop from 4.1 to about 3 times, which would also affect the other financial leverage ratios. And the non-deductibility of interest expense would affect the calculation of the weighted average cost of capital. And, finally, at least for now, the decline in corporate debt will likely increase the credit rating for the remaining debt, driving the yield down on debt that does remain. All in all, major changes to U.S. based corporations.

Bond Issuance Booming

With the Federal Reserve recently increasing interest rates, you would expect that the amount of corporate bonds issuance would slow. However, at least in the first week of January, this was not the with the largest volume of bonds issued in history. Although the recent interest rate increases would seem to be a negative, it is believed that the Fed will further increase interest rates in 2017, making future bond issues even more expensive. And, while the average yield to maturity may have increased, the current 3.7 percent is still below the average over the past 10 years. Additionally, with the expected number of mergers and acquisitions expected for 2017, companies may be stockpiling cash in advance of these announcements.

Sears' Financial Distress Costs

When a company is in financial distress and bankruptcy is possible, it may be forced into actions that it would not like to undertake. For example, Sears, which has been has been faced with declining sales and mounting losses, recently announced that it was selling its iconic Craftsman tool brand. The sale of Craftsman to Stanley Black & Decker is for $900 million. Under the terms of the agreement, Sears will be able to sell Craftsman tools for 15 years royalty free. Sears also announced that it will close an additional 150 stores.