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dwot (99.50)

Cost of Borrowing Increasing

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April 21, 2008 – Comments (4)

I've been saying for some time that I expect interest rates to increase.  Perhaps it would have been better to say borrowing rate.

Bloomberg has a story on it and basically the best businesses used to get 0.86% above government and now it is 2.35% above it. The article also says $1 trillion of debt come due this year.  That extra 1.5% costs $15 billion more in debt servcing costs.

Egads, this doesn't sound good...

"The potential fundraising would exceed the amount companies have raised in each calendar year via share sales since at least 1999, according to Bloomberg data."

But, seriously, this is already happening in the financial sector.  The losses some them were taking seemed like about 10 years of earnings.  They are suggesting that business would have to raise as much equity in a year as they did in 8-9 years?

Read the article and there are several examples of companies selling bonds to finance debt, 6.5%, 7.5%, at the expense of share holders.  This one is good, Westfarmers rate went to 11% so they are selling equity to pay off debt.

This is going to be bad when you consider all those line-their-pocket executives that loaded companies with debt to buy back shares.  It is quite possible twice as many shares will be issues to eliminate debt in the next round.

Hmmm... How good is oil if the company has to go to the markets to raise money?

"Imperial Energy, the London-based oil company working in western Siberia, tumbled 29 percent on April 2 after saying it may sell new stock to its shareholders to pay debt and fund exploration. The decline was the largest since the company went public in 2004 as investors prepared for a doubling in the company's 51.1 million outstanding shares.

Two weeks later, Imperial set the price of its 306.7 million pound ($608.5 million) offering at 600 pence a share, a 42 percent discount to the previous day's close. Had the company sold at last week's closing price of 1,000 pence, it would have only needed to offer 30.67 million shares.

``We are disappointed that the current state of the debt markets has prevented us from funding our development program as we had planned,'' Chairman Peter Levine said in a statement when the stock sale was announced."

If debt is expensive, shares will be issued, and likely at a discount to existing shareholders... 

 

4 Comments – Post Your Own

#1) On April 21, 2008 at 11:42 PM, madcowmonkey (< 20) wrote:

Yikes.....that doesn't paint a pretty picture. If I were a shareholder I would be looking for the exit. At this price, no oil company should be needing to raise more capital for debt. This just doesn't make sense, unless it is because they are paying high energy costs and didn't factor in how much they would be paying for gas:)

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#2) On April 21, 2008 at 11:55 PM, FourthAxis (< 20) wrote:

No No No, that can't be possible because the US Fed is LOWERING rates.  Get it straight!

/sarcasm

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#3) On April 22, 2008 at 9:08 AM, XMFSinchiruna (28.54) wrote:

The last time I walked into my local bank branch, it occured to me to inquire where the rates were for a 30-year fixed... just out of curiosity.  After witnesseing the speed and depth ot Bernanke's rate cuts, I figured they would have come down at least a bit.  I knew some of the rate cut would not be passed along to consumers, but I was shocked to find that NONE of the rate cut was being passed along.  The rate was exactly what it had been 2 years ago when I inquired, while rates were 300+ bps higher.  "That's usury", I exclaimed!  The branch teller smirked, not sure what to make of my reaction (or perhaps not understanding the significance of theinformation she was passing along).

Thanks for the post, dwot.

The one recurring theme amid all these news items we keep pouring over in our collective act of recession-tracking vigilance... is that the lowly consumer is the last person considered in any of this.  The shareholder... the home owner... the small entrepreneur... US!  We're the ones getting screwed royally to pay the tab on the malfeasance of the cadre of banks, hedge funds, securities brokers, mortgage brokers, etc. who all conspired to leverage our economy into ruin.

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#4) On April 22, 2008 at 9:41 AM, dwot (99.50) wrote:

Sinchiruna, be very glad that the banks have not loaned at lower rates.  I think this business of loaning long at low rates without matching deposits has created a financial disaster beyond comprehension, imho. 

I saw a post that finally helped me to understand these derivatives that freak me out so much, and it seems to me that a lot are all about the time risk of long debt to short deposits.  So, the derivate problem and this debt matching problem are most likely one and the same thing.  These things were enormously profitable in a declining interest rate market of the past 20 years.  I personally doubt that banks will ever be as profitable again in my lifetime.

But, that spread is a tax payer subsidized loan to banks that is helping them to fix the holes in their balance sheets.  This is an enormous tax payer subsidy. 

It is a shame that the banks continue to lend long term at all.  Canada's system is far more financially stable.  If interest rates have to reset the losses are limited to rate spreads of 5 years not 30 years.  If true risk was priced into the market those 30 year loans would be even higher, imho. 

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