Cost of Borrowing Increasing
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...
