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OI! Rexam’s balance sheet is wrecked

Like the contents of a supermarket bargain bin, the dent in the world’s biggest can-maker Rexam is much deeper than it looked at first sight. What had seemed like a clever way to avoid losing investment-grade status for its debt has turned into something much worse, and Wednesday’s rights issue is only a step away from a rescue by shareholders.

The  4-for-11 at 150p is miles from last week’s price of 321p, a shocking fall for a business which was supposed to be recession-resistant, at least. In hindsight, it’s odd that we ever thought it was, since cans of Red Bull and Pepsi are hardly essentials to consumers in a squeeze.

Suddenly, far from looking resilient, Rexam looks highly cyclical. The expensively-bought OI Plastics is shrinking fast, prompting Paul Checketts at Oriel Securities to argue that it’s still not too late to sell the shares.

Checketts had earlier calculated that losing investment grade status would cost between 8 and 12 million pounds a year in extra financing costs. The company still maintains that the issue avoids a transfer of value from shareholders to debt providers, although costs of 16 million pounds is a significant transfer from shareholders to banks and advisers instead.     

CIT far from out of the woods

It looks like CIT has once again narrowly escaped falling over the edge after a group of bondholders agreed to extend $3 billion to the troubled lender in exchange for high-quality collateral and juicy interest rates. The thing is CIT still needs to sort out its failed business model based on borrowing in credit markets to provide financing to small and medium-sized businesses. But as we’ve seen again and again in this credit crisis, relying overwhelmingly on markets can sink even well established banks – think Northern Rock.

CIT’s alternatives, however, are few. Its deposit base is small, and as David Hendler notes via Bloomberg, building up it up isn’t easy or cheap.