Only a couple of companies have said they are taking advantage of the blistering rally in heavily shorted stocks. Wall Street says it’s time for more of them to cash in.
So far this week, stocks of companies including
((AAL)) have been swinging wildly, driven in part by individual investors organizing on online message boards. Individuals who successfully traded the swings have reported sizable gains, and the volatility has put pressure on hedge-fund managers who were betting on declines in those stocks with short positions.
The stock-price swings have created a puzzle for companies looking for the best way to take advantage of the run-up, as it isn’t clear how long the rally will last.
raised $300 million with share sales this week, for example, but sold that stock at an average price that was well below its peak, effectively leaving money on the table.
In a note published late Thursday, strategists at JPMorgan Chase proposed a solution that could work for hedge funds and companies. It may not benefit shareholders and individual investors as much, however.
Credit-market strategists led by Stephen Dulake wrote that funds with large bets against companies’ stocks should consider buying those companies’ debt. The funds could then strike a deal with the companies to exchange their debt for newly issued stock, and then use those new shares to close out their bearish bets.
On the companies’ side, those type of deals would reduce debt burdens, and with it the risk of restructuring or bankruptcy. In fact, some of the companies caught up in the rally still have bonds trading at distressed prices, indicating persistent investor concern that the companies may have to restructure their debt anyway.
“Investors could cover challenging shorts by purchasing distressed bonds and swapping them for new shares in the company,” the strategists wrote. “This is one of several ways that companies could monetize any disconnect between intrinsic value and securities prices to improve their capital structures. We would be surprised if this doesn’t happen at some point and, in aggregate, these actions could have a modest positive impact on lower-rated credit.”
There are other options for companies that don’t involve distressed-debt exchanges. Analysts at Cowen pointed out that
has the ability to sell up to $118 million of shares in an at-the-market offering, meaning shares are sold by a broker on the open market instead of in blocks to large institutions. They expect American to sell more shares after that as well.
The airline’s net debt rose 14% last year, they wrote, and “American will need to shift its focus to fixing the balance sheet after demand comes back and the company begins generating cash again.”
Either option—a debt exchange or an at-the-market offering—would be bad for the company’s shareholders in the short run, as it would dilute their ownership stake and the value of their holdings. But to the extent that such a move would help a company avoid bankruptcy, it may be the best option; bankruptcies often wipe out shareholders entirely.
Write to Alexandra Scaggs at [email protected]