Thursday, 5 March 2009

The credit angle

The big news of recent times is that the share markets appear finally to have succumbed to the crunch.

It took some time but it was inevitable – credit and equity are not divorced (though they are in many newsrooms).

As such, orthodox articles like this, which explain the equity drop in terms of results and expectations, miss a couple of key points.

First, that the bid premium has gone. Private equity buyers have vanished, as have trade buyers. Neither can raise any debt, and paying in shares aint often gonna win friends. Cash is king, and there's not much around.

Second, the rise of distress fundamentally alters the value of shares. If dividends stop, the value of shares droop, as there’s no income. And if creditors look likely to take over, then the value of shares fall off a cliff.

So, maybe it's time to buy a new bed.

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