So Long, Stock Bubble, and Thanks for All the Cash

Clover Health Investments Corp. unsettled shareholders in November when the loss-making medical insurer, backed by investor Chamath Palihapitiya, announced a $300 million stock offering. The price of just $5.75 a share was almost two-thirds less than where it traded when joining the stock market at the start of the year.

Clover already had a decent cash pile, but waiting to raise money was risky given “potentially rising interest rates, a potential recession, and a contraction of investor liquidity, leading to a flight from technology-driven growth companies,” management later explained. It had a point: Clover’s stock has since plunged even further amid a massive rout of cash-bleeding technology firms.

As all prudent corporate cash managers know, the best time to raise money is when you don’t currently require it. The window for tech companies to cheaply raise additional funds looks to be rapidly closing—U.S. equity issuance so far in January is a fraction of last year’s pace.

Companies that racked up large cash balances are well-positioned to ride out the storm. In contrast, investors who contributed to those capital hikes have probably experienced large losses and may be more reluctant buyers next time. In retrospect, the extent of these corporate cash grabs was a warning that valuations had become detached from financial fundamentals, just as corporate insiders selling personal stock holdings were too.

To recap: Though initial public offerings (IPOs) and blank-check mergers grab all the attention, the past couple of years also witnessed an extraordinary dash for cash by companies already listed on the stock exchange.

Almost $350 billion of additional primary capital has been raised in the United States since the start of 2020, according to Bloomberg data. In the same period there’s also been almost $200 billion of equity-linked issuance—debt that can be converted into equity if the stock price rises above an agreed-upon level. That’s around double what was raised in the prior two years.

Soaring valuations allowed companies to raise fresh funds for expansion or acquisitions without diluting existing shareholders too much. Or they were able to sell convertible debt with low (often zero) coupons and a high share-conversion price (meaning low debt service costs and less future dilution).

Although much of this activity was intended to repair pandemic-hit balance sheets, investors became very relaxed about pouring money into loss-making companies, especially neophyte tech startups and meme-stocks like AMC Entertainment Holdings Inc. and GameStop Inc. Twice as many loss-making firms raised capital last year as did profitable ones.

The last hurrah came in November: Clover secured its $300 million, electric vehicle maker Arrival SA pulled in around $650 million selling stock and convertible notes, and exercise-equipment company Peloton Interactive Inc. raised $1.1 billion, having previously said it didn’t need the money. The capital hike was timely—Peloton’s shares tanked even further last week on reports it will temporarily halt production.

Unless they hedged, investors who’ve bought recent offerings have suffered substantial losses.

For example, one year ago, loss-making insurance startup Lemonade Inc. offered $915 million of stock at $165 a share, with proceeds going to the company and some large shareholders. Its share price has since fallen more than 80 percent. In June, cash-burning online car dealer Vroom Inc. sold $625 million of 0.75 percent coupon convertible notes maturing in 2026; they now fetch just 56 cents on the dollar. And Vroom’s is only one of several recent tech-sector convertibles that have lost their option value and then some, because the underlying stock has fallen so much.

Fortunately, these are often the only debts these companies have and won’t need repaying or refinancing for a while. Companies that raised equity at the peak are now swimming in so much cash, they could manage for a long time without asking for more. Perennially loss-making hydrogen-fuel-cell maker Plug Power Inc. held $4.1 billion of cash at the end of September—almost 30 times as much as it had at the start of 2020. Sports-betting company DraftKings Inc. had almost $2.5 billion of cash when last disclosed.

Still, even relatively well-capitalized firms aren’t taking any chances. Last week Virgin Galactic Holdings Inc. sold $425 million of 2.5 percent coupon convertible notes due in 2027 to help fund spacecraft development, which came on top of the almost $1 billion it’s raised via stock offerings since August 2020.

For a long time, investors were full of enthusiasm for nascent space tourism and were happy to overlook repeated setbacks. This time, the money didn’t come as cheaply: The conversion price was set at $12.80, or around 80 percent below last February’s high. The company grabbed what it could to withstand a long winter. Others might not be as fortunate.

Copyright 2022 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.