Wave of financings could prompt further volatility

As the grip of the credit crunch tightens, many company balance sheets are considerably stretched and businesses will irrefutably face difficulties in refinancing their debt during 2009.

Catherine Stanley, manager of the F&C UK Smaller Companies Fund, believes that for many UK companies going to the banks to acquire refinancing will either be impossible or prohibitively expensive, with charges running vastly higher than in previous years. Therefore, Stanley expects firms to turn to the equity markets instead.

Stanley anticipates that the markets will see a surge of equity fund raisings this year, particularly rights issues, as companies scramble to raise sufficient capital to see them through the tough times ahead. "I believe the situation will not be merely confined to small businesses, but across the market cap spectrum as many companies return to the market following their struggle to secure lending from banks," she commented.

The concern is that there are already high cash demands on the equity market and, although many fund managers are retaining greater cash positions than usual, the sheer scale of the fundraisings likely to occur this year will drain the available cash very quickly. "It's likely that corporate advisers will recommend their companies to go the market early in the year rather than later, while investors still have cash to spend," Stanley added.

The issue is expected to mainly affect the first 6 months of 2009 and Stanley warns it may be a catalyst for further volatility. "Liquidity remains poor, M&A activity is substantially slower and dividends have been cut. The scale of the refinancing required may put further strain on the already limited pools of cash and prevent the market from moving forward. In addition, investors may be forced to sell off their better performing stocks such as the defensive growth stocks in order to fund equity issuance".

Whilst cash flow into the market remains weak, Stanley stresses how vital it is for investors to remain selective about which company they support. "Opportunities to buy stock very cheaply are inevitable, especially as many companies will be forced to come to the market with deeply discounted prices. Caution is required in the selection process, as it is probable that not all companies will be able to raise the level of capital required to survive the downturn. Investors may be asked for more support later on or be left with nothing for their money," she concluded.