What does the plight of Easyjet PLC (LON:EZJ) tell us about the state of the debt and equity markets, as we enter into the next phase of the coronavirus crisis?
First, it’s instructive that the equity markets are still open to a company which has seen revenues all but disappear.
Investors may be getting a discount in the latest raise, on a share price which has already been steeply discounted, but the fact that more than £400mln of new money is coming in at all tells a significant story - equity markets are still functioning as they should, providing capital to companies when there’s nowhere else to go.
Easyjet has already unlocked a huge government, loan, and has tapped the commercial debt markets. Now it’s issuing new equity too it claims to have amassed a £3bn cash buffer that will last it through a nine month period of grounding.
Is it coincidence, though that Easyjet’s current market capitalisation sits at just under £3bn? Perhaps not.
You could argue that the company is being valued on cash only, and that given that it was loss-making before the coronavirus hit, the overall outlook is bleak. The fact that it has been fighting publicly with its founder and largest shareholder hardly helps.
On the other hand, having the equity markets available and willing to step up is on the whole an optimistic sign in regard to the long-term survival of the company. Will it be allowed to go bust? – perhaps not, now. Will former shareholders be diluted out of all recognition? – well, that’s another matter.
In the background sits a huge reserve of money, willing to support UK PLC in its hour of need, at the right price.
The pool is perhaps not as large as it was before the global financial crisis hit in 2008, but given the emergence of private equity as a dominant force since that time, it’s also less beholden to other sorts of financing commitments. So, while investment banks were stretched every which way in 2008, private equity, on the whole, can rise serenely above the fray in 2020 and pick and choose which opportunities to take up.
Commercial lenders, on the other hand, finding that a lot of their existing book is turning bad, are a much less strident presence when it comes to new sources of funding.
So it is that while new loans are being written, much of the real action has been taking place on the equity markets, where it’s also helpful that overall prices have been rising, supported by a torrent of easy government money.
In a sense, it’s deliberate, of course. This is what central banks and governors want to see. The yardstick by which all recessions are measured remains the Great Depression of the 1930s, and everybody knows that that began with a wasting of the stock market during the Wall Street Crash of 1929. Mitigate the crash, and you might go some way towards mitigating the aftereffects too. Certainly, a buoyant stock market is good for sentiment, even if the broader economic fundamentals remain on shaky ground.
It’s in this context that equity investors have committed or look likely to commit nearly £15bn in new money to shore up the UK’s listed companies, with the recent Easyjet raise demonstrating that the appetite shows no sign of abating.
The pool of capital on which companies can draw isn’t bottomless, of course. But then again, the hope is that the coronavirus isn’t endless either. And one thing that is virtually limitless seems to be the willingness of the world’s governments to provide stimulus in some shape or form. As long as that’s true, then market-listed equity will remain a favoured source of finance. Until the next black swan event, at least.