Bankers are looking for growing opportunities to extend loans to private corporations preparing to issue shares and go public as the pace of US initial public offerings (IPOs) gains momentum.
Proceeds of IPO-related loans can be used for general corporate purposes, including acquisitions and related costs. Loan issuance tied to IPOs is just starting to show signs of life after being dormant all last year. While stock valuations are lofty, IPOs are seen gathering steam this year as companies look to shore up funding, and that could mean more related lending and fee income for banks.
"It's prudent, because the company is effectively getting a credit card by lining up a revolving credit to fund future liquidity needs including working capital or modest acquisitions," said Keith Townsend, a partner and head of the capital markets practice at King & Spalding.
IPO-related US bank syndicated loan financing was nil last year, and ranged annually between US$50m and US$1.85bn over the three prior years, according to LPC, a unit of Refinitiv. That's a far cry from the US$9.7bn issued in 2014, the biggest year for US-listed IPOs in both number and dollar volume since 2000.
Refinitiv-controlled electronic trading marketplace TradeWeb, in connection with its US$1.1bn IPO last week, lined up a US$500m five-year senior secured revolving credit facility that can be upsized to US$750m with banks led by Citigroup.
"We expect that the new revolving credit facility will be used to fund our ongoing working capital needs, letters of credit and for general corporate purposes, including potential future acquisitions and expansions," TradeWeb said in a regulatory filing.
From the banks' perspective, the incentive to arrange revolving credit lines to these newly public companies is the prospect of locking in future business opportunities with the borrower. "It all comes down to wallet share - the ancillary business expected," said a senior banker.
"It's a fee opportunity," a second senior banker said. IPOs have gotten off to a slow start this year, with the 30 filed being the lowest year-to-date number since the same period a decade ago, according to Deals Intelligence, another Refinitiv unit. US IPOs, at US$6.96bn, are down 58% from the year-ago period as of April 11.
The market seems likely to gain momentum, however. While the number of IPOs that have filed and priced this year is down 76% compared to a year earlier, the number of IPOs that have filed but still await pricing is up 69%. Dominating the IPO landscape currently is ride-hailing company Uber Technologies Inc.
The company late Thursday filed publicly for its IPO, and could be one of the biggest technology stock listings ever. Uber said in a filing that it expects its available cash, cash equivalents and existing revolving credit facility will be enough to meet operational cash needs for at least a year.
Social scrapbooking app Pinterest is among companies about to go public, while Uber rival Lyft Inc and jeans maker Levi Strauss have recently priced IPOs. "You could argue that with the increase in IPOs companies will have an increased need for these types of loans, but some companies have cash on hand or other types of financing in place, so it really depends on the company," said a third senior banker.
Pinterest, in one example, which this week set a price range for its IPO, said in a regulatory filing that it expects to borrow about US$275m to pay transaction-related expenses from an existing revolving credit facility, put in place late last year.
"A lot of these guys already had their revolvers put in place up to 12 to 18 months ago, and the IPOs are just now coming to fruition," the first senior banker said. Bankers said the revolvers could be fruitful especially if borrowers have strong positive cash-flow businesses to repay current and future debt.
"If the IPO market is as vibrant as people think it's going to be through rest of the first half of the year, it's reasonable to assume we are likely to see a number of these companies, if not done already, putting a credit facility in place in connection with the IPO," said Townsend.
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