History as Guide: Lessons from the 2002-2003 SARS Outbreak

Josh Weismer
Josh Weismer Head of Equity Capital Markets
March 16, 2020

As the Covid-19 virus has spread, so has the pall its casts over the markets. Since reaching all-time highs on February 19, the major market indices have plunged into bear market territory, and volatility has reached levels not seen in years, with the VIX index trading around 80. The turmoil has sapped the primary equity issuance market and brought the IPO market to a virtual halt.

There is a prior case for this situation. From 2002 to 2003, a global outbreak of SARS, a coronavirus related to Covid-19, roiled the equity markets, both primary and secondary.

Given that history, we took a look back at that period for insights about how today’s crisis might play out.

A historical precedent

The two episodes have striking similarities, starting with timing. The first SARS case was reported in China in November 2002, with the VIX at 26.7—remember, the market was then in a volatile period coming out of the dotcom crash—and the S&P 500 at 909.8. Over the next 8 months—from November until the World Health Organization announced on July 5, 2003 that SARS was contained and no longer a threat—the VIX and S&P 500 closed at the following levels on these key dates:




VIX % Change from 1st SARS Case

S&P 500

S&P 500 % Change from 1st SARS Case

2/10/2003 Chinese health authorities announce an outbreak of SARS 34.0 27% 836.0 -8.1%
3/12/2003 WHO issues a global health alert 33.5 25% 804.2 -11.6%
5/6/2003 US reports no new cases within the previous 24 hours 20.8 -22% 934.4 2.7%
7/5/2003 WHO announces the containment of SARS 20.1 -25% 1004.4 10.4%

Source: Bloomberg

Once the WHO confirmed that the danger had passed, the market ran up unabated through the end of the year, with the S&P 500 rising another 13.8%. The VIX ended the year at 18.3, as volatility dropped another 5.6%.

SARS had a substantial impact on primary market equity issuance, as well. Despite considerable market volatility, Q4 2002 saw 24 IPOs priced to raise a total of $5.9 billion. Yet the climate quickly shifted, with just 4 IPOs raising $1.1 billion during Q1 2003. By Q3 2003, however, with SARS no longer a threat, the IPO market rebounded, with 20 issuers raising $4.1 billion in Q3, and 48 deals raising $11.2 billion in Q4.

The follow-on and convertible markets responded to SARS in very different ways. Predictably, discounts widened in the follow-on market, as investors sought larger discounts to compensate for heightened volatility and risk. By contrast, the convert market remained wide open throughout the epidemic. What’s more, in a reversal of the norm, more money was raised in convertible offerings than in follow-ons during each of the first eight months of 2003.

So what does all of this mean for today’s Equity Capital Markets?

Our view

The conventional IPO market is effectively closed for now. Even if the coronavirus’s spread slows in the near term, the IPO market is always the last to reopen after a crisis or period of sustained volatility. Expect issuance to be muted until at least Q3, with the intensity of the market’s revival mirroring investors’ views of the election. For SPAC IPOs, however, the market continues to be open - three deals have priced in the last two weeks and SPAC investors remain interested in new transactions, at least for now. Given the long-dated window for SPAC acquisitions (typically 24 months), as well as the potential increase in acquisition opportunities as stock prices decline, SPAC investors are keen to buy and still willing to support high-quality management teams. 

The follow-on market will eventually open to select issuers, with discounts wider than we’ve seen in some time. We believe companies will be able to access the market on a case-by-case basis, with heavy scrutiny placed on use of proceeds. Strategic transactions that are well communicated and appealing to investors will get done, but they will require more marketing and account education.

At-the-market equity offerings will be more widely used if the markets remain unsettled. Often employed by real estate, midstream energy and utility companies, ATM offerings enable companies to avoid steep discounts by selling newly issued shares incrementally at prevailing market prices. This allows companies to raise capital at more natural price levels when markets are in flux. Aside from the initial disclosure of an equity distribution agreement, issuers do not need to disclose their individual sales until they file their 10-Qs.

Convertibles will be the instrument of choice in the Equity Capital Markets. In turbulent times, with the 10-year trading below 80 bps, converts will maintain their appeal for issuers and investors alike. During the market sell-off of the last three weeks, 12 convertibles priced to raise $7.2 billion. With investors chasing yield and enticed by the increased option value converts offer, we believe corporates will choose converts given their attractive pricing and the lack of alternatives.

A final takeaway

The sudden eruption of market turmoil holds an important lesson for every corporate issuer: If you’re considering raising equity capital, don’t wait for the stars to perfectly align. Finance when you can, not when you have to.

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