View from City Road: Rights worries may be exaggerated

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The Independent Online
FEARS OF rights have been overdone. Investors reckon they are going to be asked for billions of pounds by companies this year, partly in order to finance an upturn.

This is on top of the pounds 1bn a week the Government is expected to raise through gilts issues and helps to explain why the market has lost some of its gains in recent days.

While there are many companies - Trafalgar House and Lucas Industries to cite two - which could do with more money, the total raised in 1993 is unlikely to be as high as in 1991 when it exceeded pounds 10bn.

Last year companies raised about pounds 5bn through rights issues, which suggests they felt no special need of cash when demand for their products was falling. Those that survived financed their needs partly through cutting costs.

Much the same will happen this year, although an upturn could create the need for more money to fund additional working capital. But even this is uncertain. Surveys by the Confederation of British Industry show a continued, but declining, excess of stocks. Some of these could, however, be obsolete.

Some extra working capital could be financed by higher gearing ratios which are running at only 25 per cent of shareholders' funds. The low level partly reflects a sharp decline in acquisition spending since 1989 and a longer-run fall in stocks, which accounted for 36 per cent of capital employed in 1978 and only 16 per cent in 1991, according to UBS Phillips & Drew. With earnings set to rise, interest cover should not give cause for alarm, in aggregate at least.

Legal & General, the insurance company, reckons that equity issues - including government sell-offs - will absorb pounds 9bn this year. If anything, that may prove high given the short window before the Government's gilts issues get under way.

Companies with good stories to tell will have no problem raising cash with their share prices at near-peak levels. Some, such as Wassall, have already launched cash calls, albeit as part of a failed acquisition scheme. Others will announce good results in the next two or three months, helping to justify their requests for cash.

These will be the companies the merchant banks will favour. They do not want to queer the pitch by launching rights that are likely to flop. Investors hold too much paper from the likes of British Aerospace, Costain and Taylor Woodrow - still trading below their respective issue prices - to want to take shares of dubious quality.

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