An article titled ‘Credit markets regain record pace’ says that “Taking advantage of open markets, companies rich and poor are selling debt – whether they need to or not”, reporting that “Bankers and investors are expecting a flood of such fundraising transactions after both bond and credit markets have soared in the past month, driving down the cost of raising capital”.  Finance 101 would say there is a prospective danger in companies borrowing more than they need, or borrowing because they can’t (or don’t want to for shareholder dilution reasons) raise equity.  Depending on fact specific circumstances, such borrowing may increase the risk profile of a company’s outstanding equity shares.  This in turn ultimately may lead to even more shareholder dilution than might be experienced today if and when equity capital must be raised to repay that debt, or in an ultimate bad result, ‘business failure’.  In my view it is one thing to be conservative and add equity financing when it is available to strength a company’s balance sheet, or to create a ‘rainy day fund’ for a company ‘because equity financing is available’ on favourable terms.  It is quite another to raise unneeded cash through debt because ‘one can’.  The latter could prove to be a dangerous game for the companies that do it if we don’t experience near-term economic recovery, and a particularly dangerous game if the world economy worsens from here.

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