With the S & P; 500 trading at 20 times earnings, and interest rates relatively low, it is no surprise that Los Angeles companies are bellying up to the securities bar, and hollering for debt or equity.
In days of yore, raising money on Wall Street might have been expensive, but it’s great source of growth capital now.
Witness these recent filings, just a sampling of what’s going on:
-MiniMed Inc., a Sylmar-based developer of infusion systems for diabetics, plans to issue up to 2.3 million shares, including one million from insiders. UBS Securities LLC is lead underwriter. At market prices last week, that’s a $64.4 million offering.
-Westlake Village-based Dental/Medical Diagnostic Systems Inc., a maker of dental cameras listed on the Nasdaq Bulletin Board, has registered a $7.5 million secondary offering. Proceeds to be used for pay off debt and for expansion.
-Agoura Hills-based Guitar Center Inc., a musical instrument retailing chain, plans an initial public stock offering of up to $107.5 million. Lead underwriter is Goldman, Sachs & Co. Deal will largely pay off debt.
-Downtown Los Angeles-based Cash Technologies Inc., which started operations in 1994, wants to raise up to $7 million in an initial public offering underwritten by Starr Securities Inc. Cash Technologies’ downtown plant processes four tons of coins a month – it’s in the business of counting coins for other businesses and banks.
Cash Technologies is also installing “Coinbanks” in bank and retail locations, which will count coins for individuals, in exchange for a fee equal to 7 percent of the coins deposited into the machine.
Money from the offering is to be used for general corporate purposes and expansion.
True, talking about the money supply is as outdated as swigging Billy Beer, but every once in a while it’s instructive to call La Crescenta-based economist Michael Bazdarich to get the view from a dyed-in-the-wool monetarist.
The word from MB Economics (that’s Bazdarich’s shop) is that the Federal Reserve Board is maintaining a fairly tight money supply, and forget about swings in the interest rates.
A refreshing aspect of Bazdarich’s commentary, on both national and local economics, is that he actually scrutinizes the numbers before pontificating and he looks back through history.
– “There are short-term variations in the money supply, but underneath it all the money supply growth is pretty slow, from 4 percent to 6 percent a year.”
– “That’s consistent with modest expansion and a low rate of inflation.”
– “This is a real dull money policy, and a real dull expansion the slowest expansion in post-war history.”
The good news for investors is that Bazdarich foresees nothing but more of the same and even lower interest rates.
Bazdarich, by the way, is a consultant to UC Riverside on that county’s economy, and for local banks.
– “People say inflation is low now, but it was even lower in the 1950s and 1960s. Inflation is not the norm, and historically these (current) interest rates are high, and very high in real (inflation-adjusted) terms. They could come down.”
– “I’m not Pollyanna-ish, but whatever is going to trigger the next recession isn’t on the horizon right now. This (slow growth) is going to go on at least another two years.”
In Bazdarich’s view, the Fed will not have to crimp economic growth due to inflationary fears, and so the current slow economic expansion can continue unhindered.
Junk is good
Bazdarich’s views are echoed by Ken Malamed, president and chief investment officer of Century City-based Financial Management Advisors Inc., a $510 million junk-bond money manager.
“The low inflation, slow growth environment is good for junk bonds, although even faster growth would be better,” he said.
As with talk about the money supply, some might think that junk bonds have had their day but, in fact, there are $400 billion worth of junk bonds outstanding today, compared with $150 billion just five years ago.
Malamed is a junk-bond junkie that’s his investment of choice, and he was rated as the No. 1 high-yield fund manager worldwide for the 10-year period ended Sept. 30, 1996, by Nelson’s Publications in Port Chester, N.Y.
By the way, junk has done well in the last five calendar years, well enough to roughly match the domestic stock market in performance.
This year, with the indefatigable Dow Jones Industrial Average already up 10 percent, so stocks have moved ahead of junk at least for now.
Things Malamed looks for when buying a junk bond include incentivized management he wants to see that management has a healthy stake, preferably in stock options or the like, in a company’s financial future.
He also likes situations where there may occur a positive surprise on the upside such as a buyout of junk-bond company by a non-junk company. That way, junk debt becomes rated AAA and the sudden ratings increase means bond appreciation.
Even without an upside surprise, companies issuing junk are better bets than in the 1980s, said Malamed. “You see more deals (junk bond offerings) that make sense. They aren’t based on wishes, what we wish will happen to make this deal work,” said Malamed.
Right now, about half of Malamed’s customers are high-net worth individuals, but he sees real growth ahead in institutions. More pension funds are interested in the high-yield market, and are issuing requests for proposals from high-yield managers, he said. “Even the Los Angeles City Employees’ Retirement System is looking at junk bonds,” he said.