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"borrowed £53bn in debt while distributing £72bn to shareholders" There is the difference

lotsofpulp 3y ago
No lender is going to lend a business money just so it can pay the owners. They must have used the debt to finance operations, as opposed to cutting the dividend or even putting more money in. This allowed them to continue to have profits in the short term, at the expense of higher interest costs in the long term (which probably cause higher prices for customers in the long term).
- WithinReason 3y ago
  Didn't InstantPot just go bust for the same reason? Somebody decided to lend them too.
  - lotsofpulp 3y ago
    I do not know what “same reason” means here. Instant Brands went bankrupt because it could not pay its debts in a timely manner, so lenders decided to take the collateral. It is possible lenders did not do sufficient due diligence, or maybe they got unlucky, but they did not lend Instant Brands money specifically so Instant Brands’ owners could pay themselves (maybe they did if there was corruption in this case, but it is not the norm otherwise why would anyone lend to anyone?). And of course, Instant Brands’ owners will lose equity and credibility in the bankruptcy, so it is not like any dividends made possible due to the financing were “free money”.
    - specialist 3y ago
      Loading up orgs with unnecessary debt is what private equity (neé corporate raiders) does. The financiers who underwrite the raids certainly get paid. All the other stakeholders lose. It's just fancy accounting talk for theft. A shell game. Like u/Spooky23 states upthread. It's wrong. It doesn't make any sense. And yet here we are.
- youngtaff 3y ago
  In the case of the UK water companies the parent fund was often involved in getting or making the loan e.g. Water company does a debt bond issue, parent owning fund takes a % of the issue (enough so that the bond issue is a success at a good price), parent fund extracts all the funds raised as a dividend, and sells the % of the issue it own too All while extracting management fees etc too
  - lotsofpulp 3y ago
    Right, so the “parent” posts a profit, and it comes (either tomorrow or next year) from revenue earned by the “child” that borrowed, trading revenue tomorrow (going to lenders) in exchange for cash today (going to “parents’” owners). Without getting into the weeds, my point was that in order for owners to end up with cash in their pocket, the business has to earn a profit, at some point. And that profit must come from revenue (higher prices for customers) minus expenses (lower quantity/quality for customers). You can insert a lender in there to shift when those cash flow changes happen, but the money must come from customers, eventually. Barring any research and development that results in technology that will allow for lower expenses and/or increased production, but I do not think that is the case here.
    - youngtaff 3y ago
      No the business doesn’t have to make a profit it just needs enough revenue to service the debt Of course what happens is many business geared this was don’t make a profit, fail their banking covenants, interest on the bond rises and eventually they go bust leaving lenders out of pocket It’s happened to many PE owned businesses
- HWR_14 3y ago
  > No lender is going to lend a business money just so it can pay the owners. Of course they will! There's an entire industry (leveraged buy outs) built around it. And more generally, lenders will let you do dumb things with the money they lend you. As long as they expect to get paid back. So, could a small business borrow money to pay it's owners? Probably not, it's not likely to get paid back. Could a multinational corporation borrow money to pay dividends? Yes, it's happened.
- fmajid 3y ago
  Money is fungible. Lending should only be used for capital investments, not operations or maintenance. The lender's money may have been used for what little capital investment is still happening, but the money they would have otherwise used was diverted to shareholders.
- bandrami 3y ago
  Wow. Yes, they do. It happens most fiscal quarters.
- theonlybutlet 3y ago
  This is how a lot of the private equity industry is funded. Shareholders are "de-risked" taking the proceeds of a refinance out of the business upfront. The financier offers the upfront loan in return for a consistent stream of their cash flow (the interest and capital on the loan, and sometimes not even the capital). These businesses tend to have very steady cash flow generation.

No lender is going to lend a business money just so it can pay the owners. They must have used the debt to finance operations, as opposed to cutting the dividend or even putting more money in. This allowed them to continue to have profits in the short term, at the expense of higher interest costs in the long term (which probably cause higher prices for customers in the long term).

WithinReason 3y ago
Didn't InstantPot just go bust for the same reason? Somebody decided to lend them too.
- lotsofpulp 3y ago
  I do not know what “same reason” means here. Instant Brands went bankrupt because it could not pay its debts in a timely manner, so lenders decided to take the collateral. It is possible lenders did not do sufficient due diligence, or maybe they got unlucky, but they did not lend Instant Brands money specifically so Instant Brands’ owners could pay themselves (maybe they did if there was corruption in this case, but it is not the norm otherwise why would anyone lend to anyone?). And of course, Instant Brands’ owners will lose equity and credibility in the bankruptcy, so it is not like any dividends made possible due to the financing were “free money”.
  - specialist 3y ago
    Loading up orgs with unnecessary debt is what private equity (neé corporate raiders) does. The financiers who underwrite the raids certainly get paid. All the other stakeholders lose. It's just fancy accounting talk for theft. A shell game. Like u/Spooky23 states upthread. It's wrong. It doesn't make any sense. And yet here we are.
youngtaff 3y ago
In the case of the UK water companies the parent fund was often involved in getting or making the loan e.g. Water company does a debt bond issue, parent owning fund takes a % of the issue (enough so that the bond issue is a success at a good price), parent fund extracts all the funds raised as a dividend, and sells the % of the issue it own too All while extracting management fees etc too
- lotsofpulp 3y ago
  Right, so the “parent” posts a profit, and it comes (either tomorrow or next year) from revenue earned by the “child” that borrowed, trading revenue tomorrow (going to lenders) in exchange for cash today (going to “parents’” owners). Without getting into the weeds, my point was that in order for owners to end up with cash in their pocket, the business has to earn a profit, at some point. And that profit must come from revenue (higher prices for customers) minus expenses (lower quantity/quality for customers). You can insert a lender in there to shift when those cash flow changes happen, but the money must come from customers, eventually. Barring any research and development that results in technology that will allow for lower expenses and/or increased production, but I do not think that is the case here.
  - youngtaff 3y ago
    No the business doesn’t have to make a profit it just needs enough revenue to service the debt Of course what happens is many business geared this was don’t make a profit, fail their banking covenants, interest on the bond rises and eventually they go bust leaving lenders out of pocket It’s happened to many PE owned businesses
HWR_14 3y ago
> No lender is going to lend a business money just so it can pay the owners. Of course they will! There's an entire industry (leveraged buy outs) built around it. And more generally, lenders will let you do dumb things with the money they lend you. As long as they expect to get paid back. So, could a small business borrow money to pay it's owners? Probably not, it's not likely to get paid back. Could a multinational corporation borrow money to pay dividends? Yes, it's happened.
fmajid 3y ago
Money is fungible. Lending should only be used for capital investments, not operations or maintenance. The lender's money may have been used for what little capital investment is still happening, but the money they would have otherwise used was diverted to shareholders.
bandrami 3y ago
Wow. Yes, they do. It happens most fiscal quarters.
theonlybutlet 3y ago
This is how a lot of the private equity industry is funded. Shareholders are "de-risked" taking the proceeds of a refinance out of the business upfront. The financier offers the upfront loan in return for a consistent stream of their cash flow (the interest and capital on the loan, and sometimes not even the capital). These businesses tend to have very steady cash flow generation.