At first glance this week’s budget projections paint President Obama as a spendthrift. The White House itself offered a grim glimpse of a future in which U.S. debt more than doubles to $17.5 trillion in a decade — an increase of nearly $10 trillion.
The $4 billion financing for Warner-Chilcott’s acquisition for P&G’s drug business is another sign of credit markets coming back to an even keel, but it’s not clear how much juice the banks have to keep the momentum going if they don’t find investors for the debt.
Shares in British Land, a big UK property company, have rocketed by almost two thirds from their March lows. After Tuesday’s results, they stand at a one-third premium to net asset value (NAV) of 361 pence per share. Fuelled by takeover speculation, the shares seem to be orbiting far above bricks-and-mortar reality.
It’s hard not to get a little nervous when you see a chart like the one Bank of America-Merrill Lynch strategists put out on the top asset performers in July. Sure, it kinda sorta makes sense that the most beaten down assets would outperform, but it makes you wonder if all the stimulus pumped into the system is setting up the financial markets, at least the most vulnerable, for another fall.
Crispin Davis wanted to bolster Reed Elsevier’s risk management business when as chief executive he spent $4.1 billion on ChoicePoint.
Last year’s acquisition was not a bad one — it’s a ray of light in Thursday’s otherwise largely depressing results for his successor Ian Smith — but the debt taken on to fund the deal is looming over him after the failure to sell the RBI magazines business.
Instead, he has been forced to raise around $1.65 billion in a large, unpopular share placing to keep on top of the $8.4 billion debt pile. A failure of risk management, then. It suddenly seems a long time since Reed handed some $4 billion from the sale of its education business back to shareholders at the beginning of 2008.
Reed is not alone in having to take such drastic action — drinks can maker Rexam needed a rights issue to keep the credit markets onside — but the 15 percent fall in Reed’s shares reflects the nasty surprise.
Reed and its advisers can expect some flak from the Association of British Insurers (ABI) which hates these big share placings because they threaten the first-refusal rights of existing shareholders.
Reed has stretched the 10 percent new share concession to the limit, adding 9.9 percent to its existing issued capital.
It protests that debt repayments are comfortably far into the future, but the move still smacks of “needs must” and Reed admits that its credit metrics are “too stretched” given the economy and its business cycle.
Add that to a retreat from its profit guidance for the year, and it’s no wonder shareholders are spooked.