As central banks continue to increase interest rates to combat elevated inflation, some businesses are parking their plans to raise new capital via the capital markets as investors demand higher rates and adjust their risk appetite.

Businesses rely on capital to run their operations and also grow into a bigger outfit. The year 2022 has been a year of new records including record inflation, historic interest rates and supply chain disruptions, forcing many businesses to either increase prices or find capital to support their growth or viability.

While there has been a recent decline in the point-to-point inflation in Jamaica, the Bank of Jamaica (BOJ) raised its policy rate from 2.50 per cent at the start of the year to 6.50 per cent at the end of September. This has resulted in borrowers facing higher interest rates on new borrowing facilities from deposit-taking institutions (DTIs) along with an increase in the interest rate on existing variable rate loans. It has also resulted in some companies choosing a different strategy when considering the capital markets.

“We’ve seen deals and heard of deals that have been parked not primarily because of the higher interest rates, but in some instances, the inability to accurately predict what it would cost. We have seen some clients that say let us wait until everything settles down. There are some deals that can absorb the higher interest rates. Business continues, opportunities still continue, but there are some deals that you know the pricing on it might make sense at an interest rate of 4-6 per cent but doesn’t make sense at 10 to 12 per cent,” said Mayberry Investments Chief Executive Officer Gary Peart at an investor briefing held last Wednesday.

Peart cited the liquidity in the system as per the aggregated closing current account balances for DTIs held in real-time gross settlement (RTGS) accounts at the BOJ. He mentioned how the balance was $7 billion around October 14 and $23 billion on October 25. The balance on these accounts declined from $32.11 billion on September 30 to $7.3 billion by October 14. The balance as of October 27 is $26.10 billion while commercial bank loans stood at $1.08 trillion as of August 31.

VM Wealth Management CEO Rezworth Burchenson echoed similar sentiments last month at an investor briefing where he said, “Even though the increase in interest rates would have caused a few transactions to pull back on the capital markets side, I think the pipeline for the team has been very robust.”

Some listed company leaders explained that the commercial banks are becoming a lot more critical in recent times with their risk adjudicators doing more heightened follow-ups with the firms. This is because many businesses which either manufacture or distribute goods are purchasing in greater volumes of inventory to account for supply chain disruptions and higher costs of products. This has in turn pushed them to question alternative sources of funding for their businesses including additional equity to either expand or chart the shallow waters.

The Junior Market has seen five companies listing so far this year on the Jamaica Stock Exchange while Productive Business Solutions (PBS) was the only Main Market company to have a public offer this year. All the Junior Market initial public offerings have been oversubscribed with the Dolla Financial Services and One on One Educational Services offers garnering more than $3 billion each. Although PBS garnered almost US$19 million in its perpetual cumulative redeemable preference share offer, it still pales in comparison to the multi-billion-dollar additional public offerings (APO) in 2021 by Main Market companies where larger quanta were raised.

“I am encouraged to see the capital markets are still strong and they have good appetite for good IPOs, APOs for good bond offerings. That’s a great sign to see that the capital markets are still alive and well and still quite strong,” said vice-president of investment banking at Mayberry Investments Dan Theoc.

Theoc mentioned that he expects Mayberry to bring at least four IPOs/APOs next year with six to eight public offerings in the pipeline. He said he also expects at least nine IPOs/APOs over the next year. JSE Managing Director Marlene Street Forrest mentioned earlier this year that there was a conservative estimate of four companies to be listed on the JSE before the end of 2022.

Peart also mentioned that while businesses are contemplating the decisions of borrowing at higher rates, he spoke to the opportunity cost which a business might forego by not acquiring the business.

“Whilst interest rates might be higher now, the opportunity to acquire a business might not be there in two years time or 18 months time when interest rates are lower. If you’re buying a business, it’s a more long-term type scenario and how you finance it is at different stages of time,” Peart added.

Refinancing typically involves an issuer borrowing new debt at a lower interest rate and paying down maturing debt. Thus, a company could refinance debt in three years from 10 to seven per cent and save on interest cost.

“Even if you’ve acquired the business at a higher interest rate, you can reprice that interest rate in a year, two years, three years, but you would still have the company. At that point in time, you reprice lower and the value creation becomes significantly higher because of what has happened with that company. Those decisions have to be made by us principals. So, it’s every five years, every three years and then you’re at the vagaries of the market at that point in time,” Peart expounded on the decision to employ debt.

While many firms are pondering their next move, some firms feel confident to expand in this environment via the capital markets due to their operational nature. Seprod Limited had acquired AS Byrden & Sons Holding Limited in June via a mixture of a bond and a syndicated bank loan. AS Bryden in turn is acquiring Micon Holdings Limited via a share issuance to the prior owners.

“We’re like everyone else experiencing higher interest rates, but environments like this reward companies like Seprod that are public and are rated. Seprod has an investment grade rating. Markets continue to be very open to Seprod. We’ve been very careful in staggering our maturities and we continue to have confidence in our banking relationships. So, we don’t see it materially changing our performance or it’s not something keeping us up at night,” said Musson Group Chief Investment Officer Nicholas Scott at a Seprod briefing last month.

The global equity markets have been taking a beating as more investors shift their capital to fixed-income instruments. Locally, the JSE Index has declined by 12 per cent this year while the Junior Market Index is up 21 per cent. Several companies have experienced 52-week lows in the last two months with last Monday alone seeing nine securities hit that new low.

Despite these economic headwinds, Theoc believes that now is an opportunity to purchase equities especially for firms that are trading at unusually low price to earnings ratios. He also expects the inflation to remain in the single digit region to pave the way for the BOJ to potentially consider tapering its rate hikes. Peart also mentioned to viewers that they should watch the inflation data to gauge what might happen at the next monetary policy committee meeting on November 18.

“If you can get longer-term bonds at high interest rates and then they start to trend down, you create significant value. If the rates start trending down earlier rather than later, it can then restart certain engines, for example, lower mortgage rates. We’re seeing where mortgage rates are going up. Lower mortgage rates leads to more development, that whole positive cycle of construction can be reignited. Also, the IPOs, other new businesses starting, and I think there’s a lot of opportunity there,” Peart closed.