Goodbye cheap debt, hello rights issues
May 29, 2008
“Last week, the gloom that recently enveloped investment banks was partially lifted,” says Louise Armistead in The Sunday Telegraph. But as usual, good news for the City is not necessarily that great for other investors; the cause of this jubilation was “a sudden rush of activity in their capital markets division” – or, in other words, a flurry of rights issues.
Those passing around the begging bowl aren’t just banks such as RBS, HBoS and Bradford & Bingley looking to patch the holes in their balance sheets. “Companies as diverse as Johnston Press, the regional newspaper group, G4S, the security group, and First-Group, the rail and bus company, announced they were raising capital too.” More shockingly, construction group Balfour Beatty, debt-free and with £380m in cash on the balance sheet, raised £186m to support its growth plans.
In short, “de-equitisation is dead, long live re-equitisation”, says Graham Secker of Morgan Stanley. For the last few years, cheap debt has allowed companies to borrow heavily for expansion. Loaned money also went to fund share buybacks – with debt significantly cheaper than equity, it made sense to retire shares, reduce capital and increase gearing.
“But the current picture is very different,” says Secker. “Debt has become more expensive and scarce, some corporate balance sheets are severely overstretched, and a global economic slowdown threatens corporate profits.” The result: the trend towards buoying up balance sheets is likely to continue and shareholders will suffer more dilution.
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