Hindustantimes.com February 05, 2002
After Enron, debt stalks corporate world seeking new victims AFP London , 04-02-2002 To be or not to be? Debt is the question. For many corporate giants wondering if they will survive the downturn or go the way of US energy titan Enron, debt is emerging as the be-all-and-end-all, a little word--but a big problem on the balance sheet. >From telecoms giants such as France Telecom, to troubled airlines such as BA, from equipment outfits like NTL and Marconi, to other more staid, venerable concerns like chemicals group ICI, intimidating debt levels have already spooked investors and savaged share prices. Economists note that this is not unusual for this period in the economic cycle: a long boom encouraged companies seduced by fat returns to borrow heavily, but then a sharp turnaround and wretched market conditions have weakened prospects and exposed critical debt levels. The fear is that the debt issue could ripple through the financial system, causing a major headache for the banks and bondholders sitting on the loans, and turning investors jittery once more. "We have seen the headline cases coming through, and there will be lots of ones beneath that," 7im fund manager director, Justin Urquhart-Stewart said. "What you are going to see now is that all of those who can't justify their current debt position coming out and saying 'that's it--we can't carry on like this'," he told AFP. Some have already admitted as much. Cable group NTL last week launched talks with bankers to restructure its imposing $17 billion (19-billion-euro) debt mountain. Equipment group Marconi and Energis have also had to work at keeper their bankers sweet, as debt levels tower above their market capitalisation. The problem has been aggravated by the failure of Enron, the US energy giant which collapsed last year, much to the embarrassment of analysts who had failed to point out the black hole at the heart of its finances. Because of this, ratings agencies such as Moody's and Standard and Poor's are expected to take a tough approach towards debt-laden companies. And a ratings downgrade can cost a debt-laden company tens of millions of dollars annually in higher interest charges--compounding the debt problem. France Telecom, which at last count was nursing debts of some 65 billion euros drummed up during the heady quest for third-generation mobile assets, is already counting the cost. Its rating outlook was notched downward on Friday and its share price has slumped. "This has reminded people that their debt is a problem," said a Paris-based equities broker. "And if Moody's has done this to France Telecom, which is backed by the French government, then they might have to look at Deutsche Telekom, BT and all the telecom groups." Deutsche Telekom is grappling with a similar debt mountain, but BT has managed to massage its borrowing down to a more manageable 16.5 billion pounds thanks to an exercise that others may well resort to: a rights issue. This method of drumming up cash from existing shareholders in return for new stock is rarely popular, but can help a company pay down unacceptable debt levels. ICI became the latest to go down this route, when it announced a cash call to raise 800 million pounds. The market's response? A 22 per cent slump in share price last week. "There are plenty of other companies out there itching to announce rights issues and waiting for the first one to gauge the response," said Neil Bennett of the Sunday Telegraph. "Now they have seen how ICI has been torn to shreds, they may wait longer. "The fund managers are going to have a great many calls on their cash," he wrote. "Some of the supplicants in the queue will be disappointed." This could leave some indebted companies with few options to pay their way: profits are under pressure during a time of economic downturn and growth in many sectors is unrealistic because of a glut of capacity and weak demand. "You are going through a period of natural selection and we are seeing various types of beasts fall away because they can't survive," said Urquhart-Stewart, adding as a crumb of comfort: "This is better news for those that are left, those that have been able to adapt to the new circumstances. If you've got cash and a good 'story' and can manage your debt, you'll be all right." Send your feedback at [EMAIL PROTECTED] ©Hindustan Times Ltd. 1997. Reproduction in any form is prohibited without prior permission. For reprinting rights, please write to us
