Debt financing gone

Another side effect of the credit crunch is the lack of availability of cheap debt financing for businesses. Companies have two alternatives: they can hold off on needed financing until the credit markets are more inviting or they can raise money through alternative means like convertible bonds and rights issues (equity offerings). According to The Telegraph, apparently, a lot of companies cannot wait because they are issuing equity right now to the tune of $100 billion over the next few months, $45 billion of it in the UK alone.

“About a year ago we knew that if we wanted to keep growing we’d have to raise more money.”

As the credit crunch continued to bite, Tyler knew that it was never going to be good timing. He waited until the GMH deal was complete and, two weeks ago, went for it.

“We were particularly concerned because no one had done a placing for ages.” he said. “But we were amazed that literally overnight, instead of being the only ones, we were suddenly one of many. “

After months of turmoil in the financial sector, investors had braced themselves for bolstering balance sheets at the banks. Royal Bank of Scotland, HBOS and Bradford & Bingley had announced plans to raise nearly £16bn.

But now companies as diverse as Johnston Press, the regional newspaper group, G4S, the security group, and FirstGroup, the rail and bus company, announced they were raising capital too. Now the City is bracing itself for fundraising by companies ranging from Barclays to Yell and Wolseley – although all three deny they have any need for the cash.

Last week the gloom that has recently enveloped investment banks was partially lifted with a sudden rush of activity in their equity capital markets division. One banker said: “Business has been slow for ages. But suddenly every chief executive wants to discuss capital raisings. We’re booked up to the nines.”

Based only on announcements by companies so far, $100bn of cash will be raised through rights issues over the next few months in Europe. Just under half – $45bn – will be raised in the UK. Analysts at Morgan Stanley predict that by the end of the year, these figures will have doubled.

The Telegraph, 25 May 2008

This level of rights issuance has got to weigh on the equity markets. At a minimum, HBOS and RBS are taking it on the chin from investors. In another article in today’s Telegraph, investors in the two UK banks say they are worried.

More than 2m small shareholders in HBOS and RBS – owners of Halifax and NatWest among many other household names – could be forgiven for thinking that they are being asked to throw good money after bad.

The share prices of both banks have collapsed to less than half their value a year ago – and now they are asking shareholders to send them another £16bn in total. HBOS hopes to raise £4bn by offering its 2.1m investors the right – hence ‘rights issue’ – to buy two newly-issued shares at 275p each for every five shares they already own. RBS aims to raise a breath-taking £12bn from its 200,000 shareholders by offering them the right to buy 11 newly-issued shares at 200p each for every 18 shares they already hold.

It all adds up to a disappointment for anyone who bought shares in these banks expecting to receive a steady income. Worse still, both HBOS and RBS say they will pay their next interim dividends in yet more of their own stock instead of the traditional cash distributions. No wonder they are touchy about these rights issues being described as rescue issues.
The Telegraph, 25 May 2008

It is reckless of HBOS and RBS to pay a fat dividend when they are writing down billions, issuing shares and should reasonably expect more to follow. At least the U.S. banks have slashed their dividends.

See also: Other posts under the label ‘UK.’

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