For the first time in 20 years, selling shares is cheaper than taking on debt
For the first time in over twenty years, it's more cost-effective for blue-chip companies in the US to issue shares than to borrow in the debt markets, as per data compiled by Bloomberg.
"After three years of losses, the Utah-based company wanted to avoid debt and pay off its loan," Riggsbee, currently a strategic adviser after retiring last month, stated. He added that it would have cost over 10% in interest to borrow, three times the rate a few years ago, so the better path was to issue equity.
While debt remains vital for corporations worldwide, and for many, it's still the cheaper option, especially as interest is normally tax deductible, few analysts anticipate a surge of equity issuance. However, if companies begin relying less on debt and more on equity in a sustained manner, the implications for corporate finance and broader markets are substantial.
For more than two decades, the global stock market has been shrinking. In the US alone, the number of publicly traded companies has nearly halved, from about 7,500 to around 4,000 today. The UK and Germany have also experienced similar declines in their numbers.
Ultra-low rates during the post-crisis years sped up this process. Companies borrowed heavily for acquisitions and share buybacks, and leveraged buyouts flourished, putting more public companies in the hands of private equity.
A reversal would reduce companies' dependence on debt, loosen the grip of private equity, and limit creditor claims on assets, all while increasing public ownership and corporate transparency.
While a flood of initial public offerings (IPOs) and secondary sales could initially lower valuations, depressing returns in the short run, over the longer term, the investing public would gain greater access to young, early-stage growth companies, bringing more balance to a market currently dominated by large, established behemoths like Apple and Microsoft.
Globally, IPOs and secondary sales have raised roughly $50