< HOME  Monday, June 12, 2006

Corporate borrowing spree screws Joe Public

The borrowing binge for U.S. companies has hit a record pace this year, and Wall Street should thank foreign investors for absorbing the glut of new debt issues.
Unreal. Foreign investors collect billions in interest, sucking the lifeblood out of corporations privileged to sell equities to the American public, and equity markets are supposed to thank them for screwing us over.
Companies have issued about $300 billion in bonds in 2006, up 30 percent from the same period last year, according to credit-rating agency Standard & Poor's Corp.

Normally, the flood of underwriting into the $8 trillion corporate bond market would have caused yields to rise and would have slowed the amount of equity raised by cash-hungry companies to a crawl.
But, there is nothing "normal" about our economy.

Bondbuyers demand their "ROI" risk-free. And in a cash-strapped environment where the rising cost of doing business and the increased cost of borrowing eats into corporate profits, "investors" prefer to collect interest than risk being on the receiving end of anemic or, worse yet, non-existent dividends.
Enter private foreign investors, who snapped up $69.8 billion of U.S. corporate bonds in March, the second-highest amount since February's $90.5 million, according to the Treasury Department.

Many of these investors are coming from countries flush with spoils from a lofty oil market, and they are looking for any place safe to stash their cash.

"Historically, foreigners haven't liked equity purchases because they don't like risk," said David Wyss, chief economist for Standard & Poor's.
Of course! Who needs equity when you can collect a ton of interest?

But, not everybody is so stupid that their corporations sell out- RISK-FREE - to moneylenders, or in this case, intellectual property lenders.
Israelis generally prefer agreements in which the licensor takes equity with the licensee.
But, alas. Here in the land of the free, moneylenders are at liberty to rape businesses for all they're worth.
"Their money goes into bonds disproportionately. The big switch in the past year is almost all private money is going into the market."

Wyss said nobody is able to track the biggest foreign, private investors, but he said most of the buying has been in Zurich, Switzerland, and London: two financial centers known to be favored by Middle Eastern investors.
Their all time favorite - whenever money, oil, or terrorism is involved - blame it on the Arabs.
This strategy has led to a tightening of spreads between Treasuries and corporate bonds, indicating strong demand.
What are spreads? That takes us to the carry trade, an industry in which parasites make money by exploiting the bloodsucking activities of other parasites. But, that's another post for another day.

For now, know that increased corporate borrowing can only be BAD NEWS for equity investors - higher interest expenses means lower dividends - that's IF they get anything at all.


Post a Comment

<< Home