Fortis Inc. (not to be confused with the merchant bank of the same name) is a publicly traded utility with gas and electricity plants across North America.  As with most utilities, its profits are predictable since the rates they can charge customers are mostly regulated and it sells a good which is a necessity of modern life. In short, Fortis should be a recession proof stock.

However, lost in all the hoop-la of the last several weeks, Fortis quietly raised over $300 million by way of a new common share issue to close on December 19 but initially announced December 2 which is troubling in certain senses. Primarily, two interesting facts immediately pop out:

• Debt is dead, long live equity. In its public release, Fortis stated that it is using $200 million of the raise to pay off a debt of a subsidiary maturing on December 1. This is the reverse of the last several years were debt raises were easy and used to pay out equity via share buy-backs (witness GE with its easy access to capital and an ambitious share buy-back program now scuttled). The supply of large and readily available debt is gone for now (to state the obvious).

• Welcome to the new reality of valuations. The purchase price of the Fortis issuance was $25.65 which was below the trading price of $27.28 on the day before the public release. This is a stark reserval of a the last several years where equity issues were above the market price.

The banks have been issuing equity almost as fast as the United States can print money to prop up their balance sheets but Fortis is not a financial institution and its equity raise is subject to different considerations than the banks. Thus, its equity raise may give an interesting peek into the markets for the short term such as:

1. Don`t look for great rebound in the stock prices. When blue-chip, dividend yield, recession proof stocks are issuing equity at below market prices, you know that the short-term outlook on stock prices is not very positive.
2. Whoever can retire debt quickest will be in better shape. Fortis has an interest coverage ratio of 1.73 (this is a ratio measuring earnings before interest and tax over interest expenses; or, it measures how easily a company can pay back debt). This is not a great ratio (anything over 2 is ideal. For example, Johnson and Johnson, a paradigm of prudent management, has an interest coverage of 38.7) but in tightening credit environments, whoever can buy the most wiggle room by settling debt will be in better shape on the inevitable rebound since lenders will actually begin lending again on normal lending practices (i.e. pre-housing bubble standards).
3. Welcome to the age of diluation. If we assume the only way to raise money is through an equity raise in the short-term, current shareholders will be diluated from current positions. Large share issuances also affect earnings per share negatively which pushes down share prices.
4. Good money still follows good deals. The Fortis share issuance is a bought deal (this means the investment banks bought the shares and will re-sell them to the public). A bought deal is a sign of confidence that the markets believe the company is a viable entity. It appears for now the markets have not completely given up hope. The good money still chases good deals. If nothing else, if you are a shareholder of companies who are doing equity raises which are bought deals, it should give you reassurance that you continue to own fundamentally desirable companies- just not at unreasonable valuations.

For full disclosure, I am a shareholder of Fortis.