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Timm

Rush In Companies Looking To Raise Capital

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For some time, I've had in my sig the suggestion of the IMF that institutions use the current bull trap (sorry, upturn) to raise capital. It looks like this may now be taking off.

http://www.telegraph.co.uk/finance/economi...alls-shots.html

WHEN three weeks ago Rexam, the packaging manufacturer, went cap-in-hand to investors for £350m to reduce its debt burden, the management were equipped with a persuasive case.

With more companies needing refinancing than institutions can realistically provide for, Rexam may not have been top priority, but as the management carefully explained, without the cash, Rexam's debt would be downgraded to junk status,triggering a domino effect on the company's finances that would prove far more costly for investors than the £350m. Investors were left with little choice by to agree.

Days later, Reed Elsevier, the publishing group, were knocking on investors' doors for the same reason. In its results statement, the company declared itself strong in terms of liquidity, cash generation and debt maturities but it said an £824m placing was necessary to maintain a "solid investment grade credit rating in the near future".

Could it be that there were a raft of companies organising their capital raisings; or at least their timing; to the beat of the rating agencies?

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Yes, it's been empirically proven that market timing in the US (and most probably in other anglo-saxon countries with developed public equity markets) is the single most important factor determining a company's capital structure: they are issuing stock when market-to-book value is high and borrowing when M/B is low.

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For some time, I've had in my sig the suggestion of the IMF that institutions use the current bull trap (sorry, upturn) to raise capital. It looks like this may now be taking off.

http://www.telegraph.co.uk/finance/economi...alls-shots.html

Have their share prices been floundering lately?

I wonder, if succesful in their fund raising, how many execs at these companies will show their vote of confidence in these companies and offload share options at even faster pace?

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Yes, it's been empirically proven that market timing in the US (and most probably in other anglo-saxon countries with developed public equity markets) is the single most important factor determining a company's capital structure: they are issuing stock when market-to-book value is high and borrowing when M/B is low.

Not saying you're wrong, but how does this fit with the fad for companies to borrow money in 2005-7 with which to buy back their own shares (at the top of the market :lol: ) ?

Remember Vodafone and that activist shareholder ("Efficient Capital Solutions" led by that moron from Marconi) which wanted the company to leverage up in spring 2007?

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Not saying you're wrong, but how does this fit with the fad for companies to borrow money in 2005-7 with which to buy back their own shares (at the top of the market :lol: ) ?

Remember Vodafone and that activist shareholder ("Efficient Capital Solutions" led by that moron from Marconi) which wanted the company to leverage up in spring 2007?

Nothing wrong at all with the point you make: I was talking averages. As you pointed, there are always outliers ;). Other than that, it's intuitive that the incumbent shareholders are best informed about the business prospects of their companies. And as for outliers, there should be plenty of them as of late: many were "tricked" by the artificially low cost of debt and capital used in their cash flow (NPV) calcs...

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To me, this is a much better indicator of where we are than all of the official figures like GDP etc, which are easily distorted by government.

Management of a decent company like Reed don't go to the hassle and potential reputational damage of raising capital that isn't strictly required, unless they think things are going to remain very tough.

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