Jeremy Warner: Desperate and not so desperate rights issues


Outlook As a textbook example of the way the credit crunch has been hurting ordinary companies, they don't come more striking than DSG International, the former Dixons electricals retailing group. Debt has risen threefold in just five months, forcing the company into a distress rights issue and share placing.

The deterioration in the debt position has little to do with falling demand, though this plainly doesn't help. Rather it is because of the withdrawal of credit by suppliers. Many suppliers now find it impossible to obtain credit insurance in supplying even relatively solvent retailers such as Dixons, so they demand cash up front, or significantly shorter payment periods. This in turn substantially increases the amount of working capital needed to keep the business going. Whereas DSG would once have been able to rely to a large extent on supplier credit to fund its business, today it has to borrow the money itself.

Predictably, the banks have demanded their pound of flesh. In extending the credit facility, they have imposed higher interest rates and banned any payment of dividends for the coming year. Strict conditions have also been placed on any resumption of dividend payments.

DSG thus falls into part of a pattern we are seeing across sectors. Banks and other debt holders are using breaches of covenants or renewal of facilities as a way of substantially increasing interest rates to borrowers.

You can call this a return to more prudent pricing of risk after the recklessly low spreads of the credit boom if you like. But a better way of looking at it is that the banks are simply finding ways of passing on the costs of their own folly to others as they seek to restore balance sheet and margin strength. As ever, it is the innocents who are the biggest losers.

There's another game banks are playing too. Many companies are being unnecessarily forced into raising new equity so as to help the banks in their deleveraging. Investors are beginning to wise up to the trick. A number of companies are already meeting resistance in trying to raise more equity to pay down debt, the latest example being the private equity group 3i. If bankers don't watch it, they will be faced with a buyers' strike across the board. Even companies with an urgent need for more capital in order to survive may struggle to raise it.

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