Monday, January 19, 2009

Harper's voracious deficit spending will crowd out corporate borrowers

Today we learn in the Financial Post that “Senior bankers are warning Ottawa that financial markets may not be able to meet the long-term funding needs of large companies in the coming year, and are arguing for pre-emptive action.”

Yes and if so, then things will only get worse as the government starts crowding out these corporate borrowers in order to fund the government's voracious appetite for debt to fund its $40 billion in annual deficit spending.

Maybe someone should invent an alternative asset class that doesn’t get crowded out by government borrowing?

I know, we can call it “income trusts”. Such an asset class would be a win-win-win. Maximize government tax collection. Afford investors seeking income with a means of direct investment in the economy. Offer issuers a low cost form of financing that isn’t crowded out by governments voracious borrowing needs. If only the NDP could figure this out. They must not like win-win-wins?

Canada's corporate bonds under scrutiny

Eoin Callan , Financial Post
January 18, 2009

TORONTO - Policymakers are shifting their attention from the woes of small- and medium-sized enterprises to the financing needs of Canada's biggest companies as they prepare for next week's budget.
After rapid progress was made in recent days by special joint industry-government working groups examining ways to keep credit flowing to smaller companies and struggling industries, the focus of discussions is turning to the outlook for blue-chip companies and the $20-billion corporate bond market.
Senior bankers are warning Ottawa that financial markets may not be able to meet the long-term funding needs of large companies in the coming year, and are arguing for pre-emptive action.
But there are divisions in the financial sector and scepticism in Ottawa over the need to intervene in the market for corporate bonds, which bankers are warning privately could be the next strut of the global financial architecture to crumple.
The most controversial proposal being advanced is for the Conservatives to create a vehicle that would use taxpayer money to either buy corporate bonds or back them with a government guarantee.
But using public finances to bail out corporate Canada could create a political time bomb and put hiring, firing and investment decisions under scrutiny.
Peter Bethlenfalvy, group managing director of global corporate finance at DBRS, says the implications of a collapse in the corporate bond market would be severe.
"In our free market, capital markets system you have to have a match between users of credit and suppliers," he says.
"Without access to the corporate bond market, some companies might get into troubles not because of their business models or strategies, but because they can't get re-financing," he adds, saying this would likely lead to job cuts and less investment and add to economic duress.
The government is already well advanced in its plans to intervene in the market for short-term financing used heavily by such non-bank lenders as auto leasing companies.
But concerns about Canada's market for bonds issued by the country's biggest firms have been brewing since new issues dropped off after the collapse of Lehman Brothers Holdings Inc., the bankrupt Wall Street investment bank.
Corporate bond issues fell by more than half in the three months after the Lehman collapse, dragging bond issuance for the year down from $18-billion in 2007 to $16-billion in 2008.
But since the New Year, market participants have seen tentative signs of renewal as pent-up demand starts to come to market.
Shoppers Drug Mart Corp. issued $500-million in corporate bonds last week, while Hydro One raised $200-million.
Mr. Bethlenfalvy said it would be hugely premature for Ottawa to intervene at a time when a drug store chain or utility could successfully sell new bonds to finance their activity.
"It would be unwise and is not needed," he said.
But some bankers who have peered into the depths of their corporate loan books and taken soundings among the investment community are more pessimistic about how well the market will hold up as a global recession takes hold.
"The corporate bond market for anything of any maturity is very weak. This could become the next big problem," said one person involved in the dialogue with the government.
Financial Post
© 2008 The National Post Company. All rights reserved. Unauthorized distribution, transmission or republication strictly prohibited.


Dr Mike said...

Wouldn`t it be funny if the only asset class left standing after all this mess clears out the corporate rabble , would be income trusts--maybe the reason these were taking over the market was because they were the best & most sustainable model.

Just thinking about it makes me feel warm & fuzzy all over.

Dr Mike.

Anonymous said...

By promising "never to tax income trusts" but then putting a double-tax on invested retirement savings, Stephen Harper has cursed the TSX. Fewer and fewer new equity issues have come to market since the 2006 Halloween massacre. In 2008, there were no significant "business" equity IPOs. The banks have put out a lot of preferred share issues but just to shore up their balance sheets--none of that financing will be finding its way to capitalization of business development.

In short, Harper's broken promise has sterilized a seed-bed of business capital formation in Canada.

Now we have the problem of a market whose two million small investors do not trust the government.

Government geegaws (e.g. TFSA) do not buy trust.