Sunday, June 24, 2007

All's well until they take to water

ICICI Bank has become a phenomenal cash-gobbling machine a la Blackstone. Both the behemoths suck up to institutional and retail investors who repose a great deal of trust in them. The response to the recent FPO of ICICI bank (issue size $ 5 billion) and the IPO of Blackstone (issue size $ 4.75 billion) are testimony enough.

In the murky financial world, there's no advance warning system for trend reversals. In the rarefied field of aeronautics, the strong tailwind that gives the forward thrust while you're airborne could be your nemesis while landing. The relevance of that allegory to financial markets is quite ominous. Banks make hay while interest rates go up but beyond a point, high cost of borrowing slows down credit offtake. Serial spikes in interest rates as have become a habit with central banks now, do not portend all too well either. Rising bond yields, hint of a looming recession in some markets and a runaway inflation in the other is enough to stir up a market cyclone that turn the best of forecasts upside down. Few emerge unscathed from this onslaught. Expanding capital base may give the bank/fund more headroom to do more big ticket deals (that deploy leveraged capital), but its difficult to pull back when the trend reverses in short notice as it has often in the past. Add to that the truism of cost of equity being higher than that of debt, you're trapped since extinguishing equity once raised is not all that easy. Debt can be retired at will during lean periods when there's little credit demand.
But right now, all's well. Besides the eagerness to capture the prevailing high valuation, it's the higher float that matters to both these cash-guzzlers. Nothing is off-limits for them now.

Barring one. K.V.Kamath and Stephen Schwarzman together should never go on a sailboat. If one of them falls overboard, the other - if unsure of his mate's swimming skills - would be loath to hold up the life preserver and ask "hey, can you `float' it alone?". The one in water might mistake it for talking business at that ungodly hour....

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