Balance sheet management has become a preoccupation of nearly every corporate issuer of debt. If the plight of credits such as WorldCom wasn’t enough to scare finance teams into decreasing leverage and enhancing liquidity, the ratings agencies did the job. Keen to look as if they were responding to events and to protect their own reputations, the credit raters have made sure that any mavericks fell into line.
That has applied across the board from triple-A rated frequent issuers to fallen angels. GE Capital, for example, has been forced to reduce its reliance on short-term debt and justify its leverage levels. It is now faced with the task of bolstering its balance sheet sufficiently to convince rating agencies that it deserves to remain triple-A if it becomes a financially independent finance company.
ABB has seen its credit rating at Moody’s fall from double-A to single-B within the space of 12 months. In the section on ABB below, CFO Peter Voser talks to Euromoney about the emergency action his company has had to take to shore up liquidity and honour debt repayments. ABB has had to do this while facing the worst conditions in its operating business for 20 years and dealing with the threat of impending asbestos litigation.
One firm’s burden is another’s prize
Interestingly, a financial burden for ABB became a prize acquisition for GE Capital in 2002. ABB sold most of its structured finance business for $2.3 billion to GE Capital last September in an effort to avoid a credit crunch. GE Capital got the business for slightly under book value. But whether it is wise for the finance company to carry on growing its $473 billion assets under management at a time when its own financial strength has been questioned remains to be seen. At the other end of the spectrum, Dutch telecom company KPN is one of the few companies that has been honoured with an upgrade by Standard & Poor’s recently. Maarten Henderson, KPN’s CFO, explains how this came about. Facing a debt mountain and seeing its bonds trading at more than 800 basis points over swaps less than 18 months ago on the back of a Europe-wide 3G licences acquisition binge, it reacted quickly, took pain early and has managed to cut its debt load by almost half.
This makes it look a much more attractive prospect than either France Telecom, which is embarking on a major restructuring, or Deutsche Telekom, which is struggling to reap value through forced asset sales. Deutsche Telekom was punished with a two-notch downgrade from Moody’s in January. The question for Moody’s now is whether it will be as quick to reward European telecoms such as KPN for restructuring promptly as it has been to punish companies such as Deutsche Telekom for being slow. The agency now rates KPN, France Telecom and Deutsche Telekom at Baa3, even though KPN is now trading as a low single-A credit.
Finally, we look at the strategy of the treasury team at Toyota Motor Credit, which has avoided all these problems by issuing debt infrequently and conserving $28 billion of cash on the balance sheet. Some investors argue that this is far too conservative and offers little value for shareholders.
This is the dilemma facing companies that are forced to restructure their balance sheets. At what point does an emphasis on deleveraging and the enhancement of free cashflow, pleasing to bondholders, become a concern for shareholders awaiting renewed growth?
For now, in the quest for the correct capital structure at these newly regenerated companies, creditor interests come first.
