Corporations Prepare For Less Access To Capital

The demand for capital by large nations has not begun to squeeze corporate borrowers out of the market, but it may soon. Companies will have to gird themselves for a time when their access to capital markets may be only through the sale of equity. The demand for that may even be challenged as pools of money finance sovereign debt and seek a safe haven among the “safest” paper issued by nations such as Germany and the US.

RBC Capital Markets found that “Demand for funding is low today, with just 38 per cent of corporate respondents expecting to raise fresh capital in the next two years. However, the competition for capital may well grow more acute as heavily indebted governments seek to raise unprecedented amounts of capital for structural outlays related to aging populations, deteriorating infrastructure and possible energy and climate crises.”The economy may slow due to austerity plans but the nations that implement them may still need a financial bridge to cover deficits that could be in place for years. GDP will likely slow. The only significant way to offset the problem is for companies to be able to expand capacity, hopefully increase sales, and perhaps hire employees. The irony is the capital markets flooded by the financing needs of troubled nations will suck huge sums of available money, which will leave many companies begging for fixed income support.

The tables may be turned on sovereign nations as their credit ratings slip. A number of multinational companies could end up with higher rated debt than the financially weakest countries.  Firms such as Microsoft Corp. (NASDAQ: MSFT) and Berkshire Hathaway Inc. (NYSE:BRK-A)  may siphon safe haven money out of the market leaving cash-strapped nations including Spain, Portugal, and Greece to compete with both national and corporate borrowing needs.

It is hard to fathom that firms with strong balance sheets and massive cash flow could be more attractive investments for fixed income investors than some countries, but the increased anxiety about buying sovereign paper that has been repeatedly been downgraded by the credit agencies could cause corporates to become the most favored investment for yield investors.

Douglas A. McIntyre