As investors return to the market, big companies in Europe are finding it easier to raise money via bonds, equities and even IPOs. The chief financial officers at some of Europe's largest firms have had a busy few months. Since markets started to recover in early summer, executives from companies including German retailer Metro and Anglo-Australian miner Rio Tinto have hit up investors for extra funds. And in the past two weeks, French banks Société Générale and BNP Paribas, as well as Italian counterpart UniCredit, have announced rights issues set to raise billions of dollars. The fact that corporations are refilling their coffers is the latest sign the worst of the Great Recession may now be over. Indeed, data provider Dealogic estimates European companies have taken in almost $221 billion through rights issues and initial public offerings so far this year. That's just below the $228 billion raised in all of 2008, which analysts expect to be surpassed by the end of 2009. Firms also have bagged $1.1 trillion through corporate bonds so far this year, vs. $865 billion during all of 2008. Nonfinancial companies-still suffering from banks' high lending fees-have scored almost two-thirds of their funding from the resurgent corporate bond market. The flurry of activity is a win-win for companies and investors alike. For recession-hit firms, the extra cash helps bolster sagging balance sheets and provides ammunition to snap up merger-and-acquisition targets at continuing knockdown prices. And for gun-shy investors -- many still hoping to recoup losses from the past two years-the chance to lock in attractive corporate bond yields and grab equity stakes amid rising markets is too good to pass up.
As investors return to the market, big companies in Europe are finding it easier to raise money via bonds, equities and even IPOs.
The chief financial officers at some of Europe's largest firms have had a busy few months. Since markets started to recover in early summer, executives from companies including German retailer Metro and Anglo-Australian miner Rio Tinto have hit up investors for extra funds. And in the past two weeks, French banks Société Générale and BNP Paribas, as well as Italian counterpart UniCredit, have announced rights issues set to raise billions of dollars.
The fact that corporations are refilling their coffers is the latest sign the worst of the Great Recession may now be over. Indeed, data provider Dealogic estimates European companies have taken in almost $221 billion through rights issues and initial public offerings so far this year. That's just below the $228 billion raised in all of 2008, which analysts expect to be surpassed by the end of 2009. Firms also have bagged $1.1 trillion through corporate bonds so far this year, vs. $865 billion during all of 2008. Nonfinancial companies-still suffering from banks' high lending fees-have scored almost two-thirds of their funding from the resurgent corporate bond market.
The flurry of activity is a win-win for companies and investors alike. For recession-hit firms, the extra cash helps bolster sagging balance sheets and provides ammunition to snap up merger-and-acquisition targets at continuing knockdown prices. And for gun-shy investors -- many still hoping to recoup losses from the past two years-the chance to lock in attractive corporate bond yields and grab equity stakes amid rising markets is too good to pass up.
But there will be no recovery unless and until individual and corporate incomes in the real economy -not the Vampire Squid economy - pick up.
That is 10 to 20 years away, if ever, in the absence of systemic fiscal and monetary reform. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
SG, BNP and UniCredit are all banks.
Did Metro and Rio Tinto use a bank as an underwriter for these equity/debt issues?
If so, how is this
Confirmation that since credit intermediaries are fucked, investors will connect directly
If not, how dit Rio Tinto and Metro manage the issues? They don't have the in-house expertise for it.
Exactly.
Banks as service providers - bringing investors together with investment, managing issues, maybe even underwriting them - none of this is credit intermediation.
Credit intermediaries are fucked through the need to conserve capital - which, as we see, they are raising from investors, while they can. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
So you're saying the banks acted as intermediaries but did not underwrite the issues?
Where did you get that idea from?
I am saying that if you are not a credit counterparty - ie a middleman standing between the depositor and the borrower - then you are not a credit intermediary.
An underwriter, as I understand underwriting, is a service provider, being paid for taking on a contingent liability to provide the finance if no-one else does. An insurance/ guarantee function, essentially
An intermediary is a middleman. We are seeing the end of credit middlemen and their replacement by credit service providers. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
We are seeing the end of credit middlemen and their replacement by credit service providers.
However,
a contingent liability to provide the finance if no-one else does
It's like the animal that walks like a duck, and quacks like a duck, but it's not a duck. In the long run, we're all dead. John Maynard Keynes
I presume you know what an underwriter does? My understanding is that an underwriting bank will only end up as a creditor/investor if they don't manage to find other creditors/investors willing to put up existing credit=money.
Would you characterise the function of debt underwriting by a bank as credit service provision, or as credit creation/ intermediation?
The fact that credit intermediation is increasingly fucked is my point, and no amount of snark will make that any less the case. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
So it's both a credit service and credit creation. The syndication is just shuffling around of money, whether it exists or needs to be created by other entities (and the part sold down by the underwriter may itslef be destroyed of shuffled elsewhere).
The only distinction between bank debt and capital market instruments is that bank debt is syndicated to a smaller pool of potential participants, and is less easy to trade. But fundamentally it's not very different. In the long run, we're all dead. John Maynard Keynes
Hallelujah. =) Peak oil is not an energy crisis. It is a liquid fuel crisis.
The problems that emerged when the investment banks converted from partnerships to corporations (something which should of course not have been allowed) came from leveraging underwriting skills in pursuit of financial middleman incomes through the invention of new financial instruments to underwrite. Freeing the financial industry from being tied to income growth in the productive sector - or so it was thought, in the midst of the bubble economy, as it is always thought in midst of a bubble economy. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
the investment banks converted from partnerships to corporations (something which should of course not have been allowed)
Lehman Bros. went public to merge with American Express, and so of course was spun off as a corporation when American Express decided to get out of banking. Salomon Bros. went public with its take-over by Phibro Corp. (which became Salomon Inc.). Goldman Sachs went public in an IPO in 1999. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
(a) Ownership and control goes with stock ownership in a corporation - in a partnership it's whatever they agree, and typically one member, one vote;
(b) Principal/Agency conflict in a corporation, between owner stock-holders and their agents, the directors/management - that need not, and probably will not, be the case in a partnership;
(c) in a Corporation members have only a collective responsibility, whereas in a partnership they have a collective and individual (joint and several) responsibility.
Limited Liability is a separate issue. For maybe 250 years until 1855 in the UK Companies and their members did not have limited liability, any more than partnerships did, and it was an extremely contentious change at the time.
Quite rightly, since as it has turned out, in return for this privilege, investors don't give much back to the society which grants them the privilege. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
For maybe 250 years until 1855 in the UK Companies and their members did not have limited liability, any more than partnerships did, and it was an extremely contentious change at the time.
An economic history hypothesis here: financial instability à la Minsky did not occur before 1855 and there was a speculative bubble starting in 1855 which ended in a severe recession.
I think most people would characterise both the South Sea Bubble and the Mississippi Bubble as financial instability, but I have yet to read Minsky's definition.
IMHO it's leverage - ie deficit-based financing, of which John Law's Banque Royale was arguably the first recognisable Central Bank nexus - that is the prime cause of instability.
Limited liability certainly wouldn't act against instability, that's for sure. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
South Sea Company - Wikipedia, the free encyclopedia
Furthermore, the scramble for liquidity appeared internationally as "bubbles" were also ending in Amsterdam and Paris. The collapse coincided with the fall of the Mississippi Scheme of John Law in France. As a result, the price of South Sea shares began to decline. By the end of September the stock had fallen to £150. The company failures now extended to banks and goldsmiths as they could not collect loans made on the stock, and thousands of individuals were ruined (including many members of the aristocracy). With investors outraged, Parliament was recalled in December and an investigation began. Reporting in 1721, it revealed widespread fraud amongst the company directors and corruption in the Cabinet. Among those implicated were John Aislabie (the Chancellor of the Exchequer), James Craggs the Elder (the Postmaster General), James Craggs the Younger (the Southern Secretary), and even Lord Stanhope and Lord Sunderland (the heads of the Ministry). Craggs the Elder and Craggs the Younger both died in disgrace; the remainder were impeached for their corruption. Aislabie was imprisoned. The newly appointed First Lord of the Treasury Robert Walpole was forced to introduce a series of measures to restore public confidence. Under the guidance of Walpole, Parliament attempted to deal with the financial crisis. The estates of the directors of the company were confiscated and used to relieve the suffering of the victims, and the stock of the South Sea Company was divided between the Bank of England and East India Company. A resolution was proposed in parliament that bankers be tied up in sacks filled with snakes and tipped into the murky Thames.[3] The crisis had significantly damaged the credibility of King George I and of the Whig Party.
Furthermore, the scramble for liquidity appeared internationally as "bubbles" were also ending in Amsterdam and Paris. The collapse coincided with the fall of the Mississippi Scheme of John Law in France. As a result, the price of South Sea shares began to decline.
By the end of September the stock had fallen to £150. The company failures now extended to banks and goldsmiths as they could not collect loans made on the stock, and thousands of individuals were ruined (including many members of the aristocracy). With investors outraged, Parliament was recalled in December and an investigation began. Reporting in 1721, it revealed widespread fraud amongst the company directors and corruption in the Cabinet. Among those implicated were John Aislabie (the Chancellor of the Exchequer), James Craggs the Elder (the Postmaster General), James Craggs the Younger (the Southern Secretary), and even Lord Stanhope and Lord Sunderland (the heads of the Ministry). Craggs the Elder and Craggs the Younger both died in disgrace; the remainder were impeached for their corruption. Aislabie was imprisoned.
The newly appointed First Lord of the Treasury Robert Walpole was forced to introduce a series of measures to restore public confidence. Under the guidance of Walpole, Parliament attempted to deal with the financial crisis. The estates of the directors of the company were confiscated and used to relieve the suffering of the victims, and the stock of the South Sea Company was divided between the Bank of England and East India Company. A resolution was proposed in parliament that bankers be tied up in sacks filled with snakes and tipped into the murky Thames.[3] The crisis had significantly damaged the credibility of King George I and of the Whig Party.
The number of outstanding shares of the company was probably around 500,000 in 1720. A stock price of 15,000 livres would have given the company a market capitalization of 7.5 billion livres. After the share price collapsed to 500 livres in September 1721, the company was valued at only 250 million livres. As a comparison, the French government expenses was 150 million livres in 1700, while their debt in 1719 was 1.6 billion livres. With the demand for company shares being high, the government and John Law set out to buy back the whole 1.6 billion livres government debt for shares in the company. The plan was successful and in 1720 the whole government debt was acquired by the company, before the company's market capitalization began to collapse during 1720 and 1721. Compare this with the debt acquisition by The South Sea Company of England that acquired 80% of the 50 million pound government debt during 1720. The South Sea Company reached a highest share price of 1,000 pounds in August 1720, a few months later than the Compagnie des Indes. As the creditors bought shares in the company with their bonds and debt papers (debt-for-equity transaction), the whole government debt became property of the company, the company became property of the former creditors, now the shareholders, and the effective control fell into the hands of the government that paid an annual 3% interest to the company, which amounted to 48 million livres. Through these transactions the French government had successfully unloaded their whole gigantic debt of 1,000% the annual budget (perhaps 200% - 400% of GDP) and was basically debt free.
The number of outstanding shares of the company was probably around 500,000 in 1720. A stock price of 15,000 livres would have given the company a market capitalization of 7.5 billion livres. After the share price collapsed to 500 livres in September 1721, the company was valued at only 250 million livres. As a comparison, the French government expenses was 150 million livres in 1700, while their debt in 1719 was 1.6 billion livres.
With the demand for company shares being high, the government and John Law set out to buy back the whole 1.6 billion livres government debt for shares in the company. The plan was successful and in 1720 the whole government debt was acquired by the company, before the company's market capitalization began to collapse during 1720 and 1721. Compare this with the debt acquisition by The South Sea Company of England that acquired 80% of the 50 million pound government debt during 1720. The South Sea Company reached a highest share price of 1,000 pounds in August 1720, a few months later than the Compagnie des Indes.
As the creditors bought shares in the company with their bonds and debt papers (debt-for-equity transaction), the whole government debt became property of the company, the company became property of the former creditors, now the shareholders, and the effective control fell into the hands of the government that paid an annual 3% interest to the company, which amounted to 48 million livres. Through these transactions the French government had successfully unloaded their whole gigantic debt of 1,000% the annual budget (perhaps 200% - 400% of GDP) and was basically debt free.
There's a great film to be made about John Law, and a couple of good documentaries. His understanding of the concept of Money was as good as any I have seen. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The long term close holding of the investment bank is what gives teeth to the practice of the investment bank holding a portion of the financial instruments that they underwrite - when the real risk of the holding devolves onto external shareholders while the short term reward to inflated financial asset pricing accrues to all executives with stock options, the fact that the investment bank holds a portion of the financial instruments that they underwrite loses a lot of its force. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
ie the whole fortune of the top management was de facto invested in the company. In the long run, we're all dead. John Maynard Keynes
It was the conversion to publicly traded corporations that struck in a wave starting after 1980 and ending at the same time as the repeal of Glass-Steagall. Of course, the incestuousness of the primary institutions engaged in managing new issues into the capital markets being controlled by shares bought and sold in the same capital markets was remarked upon, but nobody in a position of power made a big issue of it. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
