Exchanges could help restart the economy by serving as a venue for raising capital and by offering a wide range of products.

Exchanges worldwide could play an important role in the post-financial crisis environment as governments unload their positions in banks and rescued corporations, such as RBS, Lloyds, AIG, Citi, Chrysler and GM. Private equity firms are also expected to cash out of some holdings with IPOs, especially if they cannot refinance.

“Companies are going to have to come to the market with rights or other capital raising issues to seek more equity to sustain their growth as they emerge from this recession,” says Bob McDowall, Research Director, Europe, at TowerGroup. “In the first half of this year in Europe we have seen a resurgence in the European corporate bond market, larger companies rearranging their debt with low interest rates, and rescheduling, retiring old issues and bringing out new issues.”  

Governments frequently divest their holdings in companies through private auctions; however, they may choose to use exchanges to divest their holdings in rescued companies. “Exchanges will play different roles in the U.S. and the U.K.,” says Professor Bill Megginson at The University of Oklahoma, an expert in privatizations. “In the U.K. selling shares to the public through an IPO avoids scandals and helps to expand the domestic stock market. And, if the pricing is low, citizen-shareholders benefit. In the U.S. the government has used preferred shares to invest in financial firms, so those holdings will probably be bought back by the banks.”  

More tricky investments will be Chrysler and GM. “The logical step would be to sell them to a healthy foreign manufacturer, but that is politically unfeasible, so the government will probably sell them to a private equity firm or list them on an exchange,” says Megginson. “There’s no way the companies can buy back the shares; it’s not as if they prospered under government ownership, or in Chrysler’s case, under private equity ownership.”

Erik Thedéen, President, NASDAQ OMX Stockholm, points out that the Swedish government has been through this process. In the past when the government wanted to sell stakes in privately held companies, it worked each deal individually through private negotiations with investors, corporate financiers and banks. “Using exchanges would be a more natural way for governments to raise additional capital for publicly owned companies, or to sell the government’s stake to the public. Either conducting an auction or setting a price and letting individuals buy shares is preferable to striking private deals,” said Thedéen.  

Of course, other factors can impact the decision on how to sell a government stake, such as the nature of the company, its size, and the size of the domestic stock market. In 2007 when the Swedish government decided to sell Vin & Sprit, (owners of Absolut Vodka, Plymouth Gin and hundreds of wines), a few international drinks companies were the natural buyers. In the end, Pernod Ricard won the bidding at €5.63 billion, well above the €3.8 billion expected price. In this instance, the private auction was the path to take.  

On the other hand, in the U.K., Northern Rock, Lloyds and RBS almost have to be partially listed through an exchange. “If they tried private equity, the political opposition would be intense unless they got a very good price,” says Megginson. “At the very least, exchanges should lobby governments to sell their stakes to stock market investors rather than private equity firms or other financial institutions. This is how the Swiss government recently divested its stake in UBS, through open market sales.”  

Several countries that did not issue much debt before the crisis have seen their finances deteriorate and will want to build a domestic bond market. Emerging markets in Eastern Europe and Asia in particular will probably seek to develop electronic bond exchanges as a way to increase government funding. Corporations as well are realizing the value of a bond market.

“In continental Europe, companies have relied on one or two banks for their credit. Now, with the crisis, companies are finding their banks don’t have the money to lend or the risk appetite,” says Thedéen. “In the future, companies will look for another source of funding by issuing corporate debt.”

Europe can learn from the U.S. where the corporate bond market is more developed, making it possible for smaller, mid-size companies to list bonds. Success in developing a domestic corporate bond market is contingent on attracting retail investors. Additionally, bonds should be listed on a transparent, electronic marketplace.

Many factors have contributed to the financial crisis and economic recession, including loose regulation in the credit markets and lack of counterparty risk management. Exchanges can address these issues by offering a wider array of products and providing a venue that allows firms to raise capital effectively through public offerings of debt and equity. Ultimately this will strengthen the market structure and reduce dependence on bank lending.

by Tom Groenfeldt
photo Getty Images