Corporates have their capital balance all wrong
Rhodia and Cable & Wireless have too much debt, while energy companies and utilities have too little, according to a report from Morgan Stanley.
The credit report, titled ?Who's Got it Right, Who's Got it Wrong?, says that although Europe overall has the right debt-equity structure, with average leverage consistent with a BBB+ rating, many corporates and sectors are way off their optimal balance.
The research analyses how much it costs a company to raise debt as opposed to equity (its weighted average cost of capital) to discover the market's view of what debt-equity structure a company ought to aim for.
It reveals that European industrial companies should aim for the leverage profile of a BBB-rated company. If Rhodia (B) and Invensys (B+) deleveraged they would reduce their funding costs by 3-3.5%. And the European technology sector should aim for a single A leverage profile ? more like Nokia (A) and less like Cable & Wireless (BB), which could save 1.36% on its cost of capital if it deleveraged.
At the other end of the scale, energy, utilities and consumer retailers should issue more debt, their low cost of credit revealing that they are not maximising their leverage.