Banking & Capital Markets

Duck Season, Earnings Season

Decline in early profit warnings may see fewer CFOs running for cover after reporting Q4 earnings. Also: Where are all the IPOs, and Moody's warns ... StaffJanuary 7, 2002

It’s that time of the year again.

On Tuesday, Alcoa is expected to announce fourth-quarter earnings results. That would make the aluminum manufacturer the first sizable company to release Q4 results so far. On Wednesday, management at International Multifoods is also slated to come out with the company’s fourth-quarter results.

Many corporations will not release Q4 earnings until late next week, however, since their finance staffs must prepare both fourth-quarter and year-end results. But economists say the fourth-quarter report cards should give a fair indication of whether the economy is finally starting to pick up.

One fairly reliable indicator of how earnings will shake out: early profit warnings. And by that gauge, it appears Q4 announcements could be fairly upbeat. According to Thomson Financial/First Call, of the 1,204 early profit announcements made so far for fourth-quarter results, 25 percent have been positive. By comparison, only around 16 percent of early profit announcements for the first three quarters of the year were positive. What’s more, the pace of corporate profit warnings has slowed. So far, about 46 percent of all company preannouncements for Q4 results have been negative. That’s down from 67 percent for the first three quarters of the year.

You don’t have to be Milton Friedman to figure out that if corporate earnings go up, P/E ratios will start to drop. And some analysts are predicting that corporate profits in 2002 will, in fact, jump 16 percent. While that number seems a bit Pollyanna, such a scenario would certainly get more individual investors interested in stocks again. If that doesn’t do it, the 2 percent interest rate that banks are now offering on savings accounts should have investors looking for more-rewarding places to place their money.

There’s no shortage of money to invest, that’s for sure. In an interview with Reuters, Edward Yardeni, chief investment strategist for Deutsche Banc Alex, says money at zero maturity — that is, instruments easily converted into cash — has surged to $5.6 trillion. That’s up almost $1 trillion in the past year, and equals about half of the U.S. gross domestic product. “There’s enough cash out there to revive the economy, keep home sales strong and push stock prices higher,” Yardeni told Reuters. “It’s enough to create a whole new bubble if we set our mind to it.” It remains unclear whether creating another economic bubble would be a good thing.

On the IPO Calendar: A Whole Lot of White Space

It’s official: 2001 was a lousy year to take a company public. According to, only 79 companies braved the hostile IPO market last year. From 1998 to 2000, an average of 375 businesses launched IPOs each year.

The bleakness looks to be continuing so far in 2002. Despite the recent market run-up, no companies are scheduled to go public this week. The next IPO, a $24 million issue from Alliance Medical Corp., isn’t scheduled to launch until January 24.

What’s more, few companies have even filed the papers to say they plan to go public at some time in the future. Indeed, over the past two weeks, only four companies have let the SEC know they plan to launch an IPO. And of those, three companies — Altus Medical, Innovative Drug Delivery Systems, and R2 Technology — are involved with medicine in some way.

That’s not a shocker, actually. Four of the last five companies to actually take the IPO plunge — way back in mid-December, mind you — operate in the health-care sector.

The secondary market is lousy with health-care offerings as well. According to, there were 39 healthcare/pharmaceutical follow-on issues in 2001. The financial services sector was next, with 27 secondaries, followed by energy companies (24), business services (21), and insurance (18). Retailers, who were hard-pressed to come up with a compelling story for investors last year, trailed the list with 11 secondary offerings in 2001.

Fun with Refunding

As if 2001 wasn’t bleak enough, Moody’s Investors Service is now warning of a possible refunding crisis in 2003 and 2004. The cause of the cash crisis? The large amount of speculative debt maturing in those two years.

In a study released late last week, the rating agency noted that borrowers should be able to refinance the bulk of high-yield debt maturing this year — despite unfavorable market conditions. But Moody’s says much of the corporate debt maturing in 2003 and 2004 carries a junk rating. In fact, many of those bonds are rated below B1, or even Caa1.

The numbers are downright scary. Moody’s reckons that a whopping $141 billion in U.S. high-yield corporate paper and bank debt will come due over the next three years. The breakdown: $27 billion matures this year, $54 billion in 2003, and then $60 billion in 2004. Bonds represent nearly $50 billion of the three-year total, and more than half of those are rated B1 or lower — almost off the chart. “There are currently very few opportunities for issuers that far down the rating scale to refinance this debt as it matures, as many need to do,” Moody’s senior credit officer Steve Oman says in the report. “Few B-rated bonds made it to market in 2001, and this is not likely to change in 2002.”

It certainly won’t change if U.S. companies keep on defaulting on their debt. Some economists now predict the corporate default rate will hit 10 percent early this year — a figure more reminiscent of 1932 than 2002. Given that possibility, lenders will likely stick to more-creditworthy borrowers. “Bond issuance through August remained brisk, but only for certain sectors and better credits,” reports Tom Marshella, managing director and co-head of leveraged finance at Moody’s. “Then, after September 11, the high-yield bond market essentially shut down.”

You don’t have to tell that to high-risk borrowers, who have had little luck lining up lenders of late. “Even when such deals can get done,” notes Marshella, “credit risk premiums have widened to where they have become prohibitively expensive for many of these issuers.”

Of the $9.2 billion in high-yield paper maturing this year, $5.2 billion carries a Ba rating. But in 2003 and 2004, $24 billion of B1 and lower-rated paper comes due, including $10.7 billion currently rated Caa1 or lower. If market conditions don’t improve, credit experts say there could be a rash of corporate defaults — and little investor appetite for high-yield paper.

One more thing to watch: 16 percent of the high yield bonds maturing in the second half of 2002 are convertibles. Many of those are currently way out of the money for a possible conversion to equity. If those convertibles remain busted, expect investors to avoid high-yield convertible bonds like the plague.

Accountants on Parade

According to data gathered by, PricewaterhouseCoopers was hired to work on more initial public offerings last year than any other accounting firm. In 2001, PwC was brought in on 24 IPOs. Those offerings raised a total of $22 billion for corporate issues.

Ernst & Young was next on the list, which ranked accounting firms by the total amount raised in their IPO engagements. E&Y, which helped first-time issuers pull in about $9.2 billion, was followed by Andersen. Rival Deloitte & Touche — which recently conducted a peer review of Andersen — came in fourth on the IPO list. Ironically, Grant Thornton beat out KPMG for fifth place on the table, even though that accountancy was only involved in one initial public offering last year. Grant Thornton’s lone IPO client? KPMG Consulting.