Fixed interest fix
The difficulties that Oz Minerals has had with the banks and the dilution that GPT has experienced with equity raisings point to a better way of raising capital from the markets.
The KGB interrogation of outgoing Oz Minerals chief Andrew Michelmore provides a graphic description of what it is like dealing with some Australian banks in 2009.
According to Michelmore, a bank's demand for repayment can have nothing to do with your overall financial position. In the Case of Oz Minerals, one local bank and at least one foreign bank needed the money and simply demanded the company repay, taking no account of the fact that it was very solvent and was paying all interest.
Go to our Wheels and Deals section and you will see the details of a series of capital raisings by listed property trusts such as GPT and Bunnings Warehouse Property Trust. They are clearly frightened by the potential of the forces that Michelmore described so are lowering their gearing to much safer levels. There will be more property trusts that take a similar stance in the current market rally.
The next group of companies that may need to raise capital are the various power utilities, some of which are much too highly leveraged for this environment. There has also been speculation of mergers that would include gas distributor Envestra.
Two of the toll road companies, Transurban and ConnectEast, have already raised capital and may not experience the bank blow torch that Michelmore encountered, but if they strike trouble with their lenders on debt maturities they will need to look hard at returning to the equity market.
But there is an alternative to equity rising for groups like property trusts, power utilities and toll raids. There is an army of self managed superannuation funds with cash at the ready. Some of it is now going into the share market but a lot is on the sidelines frustrated by the low interest rates being offered by banks.
A theoretical alternative for GPT would have been to go to the public with a debt offer either along the lines taken by Tabcorp or simply by separating out a series of wonderful property assets and offering a first mortgage over them up to, say, 40 or 50 per cent of their value.
GPT adjudged this was not the best course, but that does not mean it could not be used by others. Another alternative might be convertible notes.
Now is the time to undertake public interest bearing securities raisings. Later this year, and in subsequent years, there is going to be an avalanche of government and infrastructure issues soaking up the money in the market.
For anyone raising interest-bearing capital that has no equity conversion right the security must be first class. Banks and top insurance companies might be able to go the hybrid route but for most other companies, interest bearing paper issued to the public must offer senior security that either ranks with the banks or is just as good.
Borrowing from the public might be complex, but it is a lot better than being at the mercy of a panicky banker.
Footnote: Andrew Michelmore and many of the old Oxiana team are now going to build a major resource operation for the Chinese instead of Australia, partly because of an Australian bank that Michelmore does not name.
According to Michelmore, a bank's demand for repayment can have nothing to do with your overall financial position. In the Case of Oz Minerals, one local bank and at least one foreign bank needed the money and simply demanded the company repay, taking no account of the fact that it was very solvent and was paying all interest.
Go to our Wheels and Deals section and you will see the details of a series of capital raisings by listed property trusts such as GPT and Bunnings Warehouse Property Trust. They are clearly frightened by the potential of the forces that Michelmore described so are lowering their gearing to much safer levels. There will be more property trusts that take a similar stance in the current market rally.
The next group of companies that may need to raise capital are the various power utilities, some of which are much too highly leveraged for this environment. There has also been speculation of mergers that would include gas distributor Envestra.
Two of the toll road companies, Transurban and ConnectEast, have already raised capital and may not experience the bank blow torch that Michelmore encountered, but if they strike trouble with their lenders on debt maturities they will need to look hard at returning to the equity market.
But there is an alternative to equity rising for groups like property trusts, power utilities and toll raids. There is an army of self managed superannuation funds with cash at the ready. Some of it is now going into the share market but a lot is on the sidelines frustrated by the low interest rates being offered by banks.
A theoretical alternative for GPT would have been to go to the public with a debt offer either along the lines taken by Tabcorp or simply by separating out a series of wonderful property assets and offering a first mortgage over them up to, say, 40 or 50 per cent of their value.
GPT adjudged this was not the best course, but that does not mean it could not be used by others. Another alternative might be convertible notes.
Now is the time to undertake public interest bearing securities raisings. Later this year, and in subsequent years, there is going to be an avalanche of government and infrastructure issues soaking up the money in the market.
For anyone raising interest-bearing capital that has no equity conversion right the security must be first class. Banks and top insurance companies might be able to go the hybrid route but for most other companies, interest bearing paper issued to the public must offer senior security that either ranks with the banks or is just as good.
Borrowing from the public might be complex, but it is a lot better than being at the mercy of a panicky banker.
Footnote: Andrew Michelmore and many of the old Oxiana team are now going to build a major resource operation for the Chinese instead of Australia, partly because of an Australian bank that Michelmore does not name.
Share this article and show your support
Call 1300 880 160
Start a chat
Schedule a call
