The many stages of grief over balance sheet repairs
Investors will go through many stages of grief over the balance sheet repairs they will have to fund before there is an enduring stock market recovery.
Seasoned bankers tell their acolytes “go big, go early (and hope not to go back a second time)”. Whitbread went fast and big and dubbed the issue as opportunistic, giving the group financial flexibility and the ability to take share from other hoteliers. Lombard suspects it was more defensive for a hotel company earning almost nothing from its rooms and incurring hefty costs.
The truly opportunistic cash call is Segro’s £680m placing of 7 per cent of its shares. As was Boohoo, the retailer defying the sector trend, which raised a tiddly £200m last month followed by an acquisition a fortnight later. Tellingly, Segro’s placing was oversubscribed although its shares dipped a fraction. These are the lucky few that can raise funds to mop up their overburdened rivals.
The next stage of grief will come with bigger rescue rights issues at steeper discounts. These issues — clunkier and time-consuming — will continue until fatigue sets in and for as long as fund managers have the wherewithal to back them.
For now, companies have access to liquidity and secured waivers to debt covenants. But a solvency crisis looms once groups draw down on overdrafts and jack up their balance sheets with borrowings they can’t pay off.
There are already signs of what is to come later in the year. Two weeks ago, new equity raised averaged 27 per cent of share capital and most stock prices rose. It has been rising steadily to about 33 per cent and discounts have widened, according to Peel Hunt.
Builders, miners and banks who tapped investors for cash during the financial crisis a decade ago, raising £76bn in 2009, have stronger balance sheets. This time retail, travel and leisure, and retail-oriented property companies are most in need. Investors have been happy to stump up so far — more than 90 per cent of Whitbread’s shareholders took up its two-for-one rights issue. Shareholders will be increasingly discriminating as their coffers run low.
We are moving through the early stages of grief. The market is hoping for a V-shaped recovery. Market greybeards know we will go through more phases of denial, depression and anger — not necessarily in that order — before reaching equilibrium.
BDO aims for the big time
BDO’s climb up the audit rankings isn’t quite a case of the Big Four tossing a few crumbs to those less fortunate, but it’s not far off.
BDO, the UK’s fifth-largest accounting firm by revenues, now audits more listed companies than EY, Deloitte or KPMG, according to numbers from Adviser Rankings.
KPMG’s descent to third place by number of clients from first at the end of 2018 has been marked. But the Big Four still have the FTSE 100 sewn up. The rest of the audit market doesn’t get a look in, with all 100 firms audited by the big boys in 2018.
BDO’s ascent is nonetheless significant. It now has 15 clients in the FTSE 250, up from just five a year ago. If it can continue that trajectory, it could build a solid base of mid-cap clients to eventually catapult the accounting firm from mid-tier to the big league and FTSE 100 audits. Creating strong competitors to the incumbent oligopoly should help strengthen the market and improve choice for companies.
Keeping quality up is clearly the challenge. BDO has so far dodged the public scandals that have embarrassed competitors.
Its audit quality scores doled out by the watchdog were as good or better than the Big Four last year. But rapid expansion has been tried before, most recently by Grant Thornton. That experiment did not end well: GT is in the process of retrenching and profits in its audit division fell 90 per cent in its latest lot of results.
BDO says it is beefing up its staff to avoid obvious pitfalls: it has made high profile, well-respected hires in quality assurance, not least former Financial Reporting Council director Melanie Hind, and raided its rivals for partners. Still, its audit payroll is nearly 20 per cent fatter than a year ago. That is a lot of new staff to swallow.
There will undoubtedly be hiccups to come. If BDO can avoid serious obstructions, it might have a shot at some of the Big Four’s more substantial clients too.
Happy birthday Hornby
Many happy returns to Hornby on its 100th anniversary since it introduced its first tin-plate locomotive in 1920. It deserved its 7 per cent share price bump for that on Wednesday, although not much else.