Jason Nissé: The name is bond - long-term, low-yield bond, Mr Chancellor
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Your support makes all the difference."When people ask me what I do, I say I'm in corporate finance. For the first time in ages this is an accurate description."
"When people ask me what I do, I say I'm in corporate finance. For the first time in ages this is an accurate description." This was the comment made to me by an old chum who works at a City investment bank. For most of the last few years he has been working on bids and deals – should company X buy company Y, and if, so how much should it pay? Now he is working with groups, restructuring their balance sheets. His message is simple: "If you can, borrow. If you can't, borrow anyway. Debt is the new equity." There has never been a better time to borrow money.
Look at the facts. Short-term sterling interest rates are 4 per cent. Long-term rates are not that much more expensive. And the UK has the highest rates in the free world. If you want to borrow in dollars or euros and swap the money back into pounds, go ahead. The risks are low.
There is a massive demand for bonds. For boring accounting reasons, companies like Boots and Invensys want to get their pension funds out of risky equities and into dull, boring bonds (whether this is the right thing for the beneficiaries is open to debate). There is an estimated £80bn worth of pent-up demand for low-risk bonds. Someone has to fill the need.
Lots of people are taking the plunge. Anyone who can in the property sector is issuing bonds – and long bonds at that, 10 years, 15 years, 20 years. Racy developers who lived on the seat of their pants now have balance sheets that look like Land Securities on a dull day.
In other parts of the market, companies are waking up to the possibilities. Scottish Power recently geared its water business up to its gills to restructure its balance sheet. Others will follow suit. (What happens if there is another tough price review or Brussels carries through with its threat of getting tough on environmental clean-up is another matter.)
In telecoms, though, they still haven't got the message. Marconi desperately needs to restructure its balance sheet. But its room for manoeuvre is small. Telewest and Energis, which are in far less danger of going bust, have bonds trading well below their par value. There must be a way of swapping them for something less risky and saving a few bob.
Some people, though, are missing out. Dear old BT is spinning off mmO2 and selling its property portfolio to cut its debts. But most of this debt is at variable rates, so what it should do is swap into fixed rate and not worry. It has the cash flow to pay. Royal & SunAlliance was scared of going to the market with a rights issue but needs cash to grow its core insurance business. So it is selling some £800m worth of perfectly good operations when it should be looking towards some sort of convertible bond or quasi-equity that would be considered capital by its regulators. However, the person who should be using the low interest rate environment to his advantage is one of its architects – Gordon Brown. He needs to raise £20bn or so to fill the funding gap caused by the slowing economy and the Afghan war. But how?
The conventional answer is a gilt- edged issue. But surely Gordon is more imaginative than that. The US government has just said it is no longer going to issue 30-year Treasury bonds. This creates a gap in the market for long-dated, low-risk issues which could be sold with low coupons. Selling dollar bonds is not new for European governments, though, to be honest, the Treasury might consider long-dated sterling bonds a pretty good bet given the appetite out there.
The danger of borrowing at such low interest rates is that it shows up the difference between how much the Government can borrow at and how much needs to be paid by companies backing these PPP deals, like the Tube. The price of borrowing there is rising, because the collapse of Railtrack is increasingly seen as the "regulatory risk". And this is eating into the supposed savings delivered through private sector management.
So will low interest rates undermine Labour's love affair with the private sector? It's an intriguing thought.
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