The global credit crisis is rapidly changing the way large companies source cash to help strengthen their balance sheets, ABN Amro Craigs broker Peter McIntyre says.
In the past, local bodies such as the Dunedin City Council and Auckland City Council and large companies including Fonterra had used commercial paper for short-term funding.
Commercial paper was unsecured, short-term debt, typically used for the funding of accounts receivable, inventories and meeting short-term liabilities.
It was unusual for that commercial paper money to be used for longer than nine months, he said.
As interest rates dropped, the commercial paper could be refinanced at a lower rate.
But with the credit crisis, interest rates on commercial paper had soared and the cost of credit had risen accordingly.
Now, companies like Fonterra were going to retail investors - "mums and dads" - to raise capital for longer periods to get some security of funding.
A lot of the debt was being priced in relation to what credit rating the company had.
While in the past companies could get away with paying a margin of 0.2% to 0.3% above market rates, now they had to look at 2% and beyond to attract money.
Debt issues were flooding into the market, including from the Government, which was seeking to raise cash domestically, rather than borrowing overseas, Mr McIntyre said.
The issue of debt on company balance sheets was one of the major factors being looked at by brokers when companies started reporting last week.
Fisher and Paykel Appliances broke the news last Monday that it was having cashflow problems but it would not be the last company to make that sort of announcement, he said.
"Until then, our companies had done reasonably well in warding off the credit crisis. Certainly, they had performed better than Australian-listed companies which have been hit by margin calls on key shareholders, excessive debt and falling earnings.
"But the FPA bombshell shattered the illusion that we would somehow avoid the impact of the worst of the credit crisis."
The market would see other companies run into difficulty because of high debt, falling earnings or both, Mr McIntyre said.
Investors should be focused on two key issues - the sustainability of earnings as that drove the dividend yield, which was important this year because of low deposit rates, and the company's debt profile.
"Does the company have a robust and sound balance sheet giving it the ability to weather this ferocious financial storm?"With term deposits at banks likely to fall to 1% by the middle of the year, corporates were ready to soak up that money as the deposits came due, he said.
With "visibility" very low on full-year profit announcements, Mr McIntyre said there was no incentive for investors to buy into the sharemarket before July or August at the earliest.
Corporate and local authority debt issues paying good interest rates should be considered case-by-case as companies now needed to be friends with retail investors, he said.
