Since roughly the middle of the year, bankers in the debt capital markets have been preaching to corporate CFOs that the time to re-lever has come. Not only is it financially rational to do so – given that interest rates and credit spreads are still historically low – it is inevitable: the markets will force companies to increase borrowing.
Equity investors are rewarding those companies that are pursuing mergers and acquisitions and are increasing capital expenditure. Indeed, the results of the Merrill Lynch survey of fund managers for August, which polled 228 investors managing nearly $1 trillion, indicated a new preference for companies that invest funds in their own businesses to achieve growth rather than returning it to shareholders via dividends and share buybacks.
This is new and startling.
The bankers' increasingly aggressive message to CFOs is this: you know very well that you are subject to a leveraging cycle that you are powerless to resist; that cycle is now turning; you would be well advised to borrow now while costs are low, rather than waiting until the debt markets are crowded with other issuers and costs go up; you can't withstand the leveraging cycle, so get in front of it.