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"credit Crunch": The Next Round

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http://www.telegraph.co.uk/finance/newsbys...-cash-call.html

The fundraising will make Rexam the first to warn explicitly about the need to secure fresh capital in order to maintain its investment grade status, and is likely to be followed by other major corporate names as they battle to avoid downgrades by the principal ratings agencies.

The real economy, in this case a manufacturing company that's sound and profitable by any normal standard, has to raise money. Direct fallout of the government bleeding the real economy dry to bail out zombie banks, car makers and dealers, etc.

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http://www.telegraph.co.uk/finance/newsbys...-cash-call.html

The real economy, in this case a manufacturing company that's sound and profitable by any normal standard, has to raise money. Direct fallout of the government bleeding the real economy dry to bail out zombie banks, car makers and dealers, etc.

Actually, a business which fuelled expansion by leveraging debt is not my description of 'sound' - unless you include the hollow clanking of their coffers.

This is an exercise in raising capital in order to avoid paying even higher interest rates on their debts than they do now.

The real economy is suffering but these people didn't properly stress-test their business and are now going cap in hand to their shareholders.

Methinks there will be more.

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Actually, a business which fuelled expansion by leveraging debt is not my description of 'sound' - unless you include the hollow clanking of their coffers.

This is an exercise in raising capital in order to avoid paying even higher interest rates on their debts than they do now.

The real economy is suffering but these people didn't properly stress-test their business and are now going cap in hand to their shareholders.

Methinks there will be more.

Bonds should be a valid alternative to equity - up to a reasonable point. We've had companies that clearly overstretched (like PFD - I made good money by buying into their fundraising at 26p and taking profits at 45p). But I didn't think Rexam fell into that category!

But I'm profoundly ignorant of corporate finance. What would you call a safe equity-to-debt ratio? Should we be in the same ballpark as with mortgages, and if not, why not?

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Actually, a business which fuelled expansion by leveraging debt is not my description of 'sound' - unless you include the hollow clanking of their coffers.

This is an exercise in raising capital in order to avoid paying even higher interest rates on their debts than they do now.

The real economy is suffering but these people didn't properly stress-test their business and are now going cap in hand to their shareholders.

Methinks there will be more.

This is twaddle. If you don't deliver shareholders the returns they expect you are out of a job, during the years of low cost borrowing they wouldn't have been interested in listening to your debt is bad dogma.

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Bonds should be a valid alternative to equity - up to a reasonable point. We've had companies that clearly overstretched (like PFD - I made good money by buying into their fundraising at 26p and taking profits at 45p). But I didn't think Rexam fell into that category!

But I'm profoundly ignorant of corporate finance. What would you call a safe equity-to-debt ratio? Should we be in the same ballpark as with mortgages, and if not, why not?

The article says they have £2.6bn debt (£800 million of which recently re-financed), and falling profits c£130 million on flat revenues of £2.2bn. I'm guessing that they can continue trading without too many problems. I think the bigger problem is that cash-rich businesses are like hens' teeth nowadays - we bleed businesses dry in the name of shareholder value.

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This is twaddle. If you don't deliver shareholders the returns they expect you are out of a job, during the years of low cost borrowing they wouldn't have been interested in listening to your debt is bad dogma.

Exactly, the markets will hand you up your own **** on a plate unless you source operating and investment capital from the deepest liquidity pool available.

Which until quite recently has been the debt markets.

Yet another unintended consequence of asymmetries in reserve policies (there's no reason at all that the equities market should have been so expensive - this is fallout from the Greenspan put).

Edited by ParticleMan

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Actually, a business which fuelled expansion by leveraging debt is not my description of 'sound' - unless you include the hollow clanking of their coffers.

Indeed.

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I think the bigger problem is that cash-rich businesses are like hens' teeth nowadays - we bleed businesses dry in the name of shareholder value.

No.

We merely demand that they use their capital efficiently.

There's no reason to permit any business to levy an economic rent on their assets; this is prima facie a pricing inneficiency that the market will in due course discover and nuke from orbit.

A business sitting on a stockpile of cash is not a business making the best possible good at the lowest possible price and paying the highest possible wage.

The fact that business discovered that raising capital through equity was less efficient than raising it through collatoralised debt (or workalikes) is a feature, not a bug.

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This is twaddle. If you don't deliver shareholders the returns they expect you are out of a job, during the years of low cost borrowing they wouldn't have been interested in listening to your debt is bad dogma.

And therein lies one of the major problems of our system. It is seen at its worse in the recent banking crisis. Banks managements were competing with each other to lend more in search of greater profits and shareholder returns as well as bonuses. The result: massive bailouts by the taxpayers and a global recession / depression. What a great model of capitalism we are pursuing!

Edited by Hip to be bear

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And therein lies one of the major problems of our system. It is seen at its worse in the recent banking crisis. Banks managements were competing with each other to lend more in search of greater profits and shareholder returns as well as bonuses. The result: massive bailouts by the taxpayers and a global recession / depression. What a great model of capitalism we are pursuing!

In fairness, one mitigating factor is that more people were chasing more returns to pay for their retirement than ever before. Too much money chasing too few genuinely viable investment opportunities.

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In fairness, one mitigating factor is that more people were chasing more returns to pay for their retirement than ever before. Too much money chasing too few genuinely viable investment opportunities.

It is the same in the retail world too, is it not?

Over leveraged private equity that is struggling to survive the down turn, trapped into ridiculously high rents due to the consumer bubble.

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It is the same in the retail world too, is it not?

Over leveraged private equity that is struggling to survive the down turn, trapped into ridiculously high rents due to the consumer bubble.

Yep, trapped into ridiculously high rents as a result of the foolish malinvestment of others.

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This is twaddle. If you don't deliver shareholders the returns they expect you are out of a job, during the years of low cost borrowing they wouldn't have been interested in listening to your debt is bad dogma.

Borrowing large amounts of money to expand certainly seems to have served Rexam's shareholders handsomely - just goes to show how efficient the market is I guess.

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Borrowing large amounts of money to expand certainly seems to have served Rexam's shareholders handsomely - just goes to show how efficient the market is I guess.

Really? The share price appears to be almost exactly what it was 10 years ago, and the dividend is in the 2-3% ballpark. Shareholders seem to have been short-changed. Though as with so many companies, anyone who bought in March is currently sitting on a good profit!

The point I think people are trying to make is that it's a competitive world, and if you pay above the market rates for any of your costs - and finance is one - your competitors get to poach your market. Even without finance costs, I should imagine Rexam's labour costs give them a challenging startingpoint against, say, a chinese competitor.

Still, at least Rexam can raise money. The same may not be true of many smaller businesses hit by this crap. But you only hear of them when they affect someone you know, or in the unemployment figures: the real cost of the bubble and bailouts.

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