Raising capital!

Last week my blog focused on stock markets, a key way for companies to raise much needed capital, however alternative methods to equity finance are out there… namely debt finance!

To start up new business as an individual or even to expand an existing company funds will be needed. So how can individuals/companies find these funds? If we didn’t have options like this for raising finance then we’d have far fewer companies out there and I think the business world would be a different place!

I will first touch on the equity finance market. A trend amongst stock exchanges in recent times appears to be mergers, with exchanges across the globe competing to become the champion. To do this lowering their prices is important and mergers are seen by the exchanges as a way to achieve this.

In the news this week has been talk of the failed attempt at merging the NYSE Euronext and Deutsche Borse stock exchanges. The deal was brought to a halt by European competition regulators who believed the combined exchange would have hold too much financial power in the trading world. It was claimed it would create a near monopoly, which was seen as unfair on competition grounds with the exchange covering around 90% of trade across the globe (BBC, 2012). This would make it hard for it European competitors to retain their competitiveness (Huffington post, 2012). The following video displays these concerns:

http://www.bbc.co.uk/news/business-16838854

In response both exchanges announced they will now focus on smaller acquisitions to boost their existing business. Although it has been a disappointing result for the stock exchanges themselves, I feel the news will be well received by shareholders wanting the financial markets to remain competitive allowing them to take advantage of the best prices. Linking back to last week’s blog which brought up the theory that in an efficient market share prices will rise in response to positive news, this was reflected in the 4.6% rise in NYSE share price (Yahoo! Finance, 2012).

i will now turn to debt finance, this has been on the rise over the past few decades. It has an advantage over equity finance in that it’s less expensive due to a lower rate of return and the tax deductibility of interest. However this form of debt must be repaid over a certain time period (Arnold, 2008).

For larger companies out there, one method of raising finance through debt is using a syndicated loan. This type of lending is becoming more popular and it’s easy to see why… it allows for companies to borrow large amounts which one bank alone may be unwilling to provide. Here, a number of banks group together and contribute towards the total required funds. So, while it is benefitting the companies in that they can acquire the funds they desire it is also helping the banks by allowing them to spread the risk (Arnold, 2008).

A recent company in the news regarding its syndicated loan debt is Xstrata. The company has asked banks to keep its $6billion of existing syndicated loans in place throughout its $90billion merger with Glencore. This will allow the companies to wait until the merger has gone through before having to consolidate its loans into a new syndicated loan (Reuters, 2012). It would seem banks are keen to cash in and become a part of this merger with Barclays winning an equity advisor role at last minute. The bank already lends to Xstrata along with underwriting many off the company’s bond issues and yet it was originally left of the list of institutions involved in the merge (Telegraph, 2012).

Between them Xstrata and Glencore are among the biggest borrowers or syndicated loans, as banks attempt to reduce their individual exposure to the company which has in the past been reliant on their loans. The company will have to restructure its debt finance upon merging as together loans will exceed the lending limits set by the banking industry.

Glencore has a net debt of $12.9 billion, with Xstrata just behind at $8.1 billion of net debt. So would these companies be able to pull of such a merger without the availability of debt finance? I think it is unlikely as it was only through the banks waiver terms for throughout the merger that the companies were able to maintain sufficient working capital. One positive however it that if they pull it off no new debt will have been created, which has surely got to be a benefit for the shareholders?