Blog3: Equity Finance& Debt Finance

Barclays, which was operated for almost 326 years in UK, has got numerous lessons in raising finance area. Bob Diamond, Barclays’ new CEO, declared the media conference in last week that the bank suffers great pressures of tougher capital requirement. In order to meet their capital demand, Barclays began its expansion plan. Consolidation with Spanish distressed regional savings bank and South African bank are typical examples in raising finance. However, given Barclays’ severe performance condition, will those investors still believe in Barclays without looking at the potential return of finance? Maybe not! Hence, in my viewpoint, if companies want to raise capital through equity, what they should consider is the rate of return which offers to their investors. Companies are not recommended to focus only on their own profit increase but ignore their investors’ interests. In terms of investors, they tend to analyzes companies’ information and financial performance according to prospectus provided by underwriters or brokerages. Therefore, banks like Barclays who suffers a great recession in its business may have difficulties to increase its capital through raising equities.

Apart of equity finance, debt finance becomes prevalent among companies. Bond is regarded as the most common debt raised by companies. However, from my perspective, bond can be one of the most risky methods for banks. For example, banks will suffer large risk of inflation if people borrow a large amount of long-term bonds. Therefore, so many central banks have real concerns about inflation, and make bonds interest materially more expensive for companies to do business. This can be one of the main reasons for credit crisis in 2007. Another method of debt finance is syndicated loans, which can retain customers and spread risks at the same time. Like Barclays’ cooperation with China Development Bank (CDB) in 2007, Barclays ask CDB to invest almost 22 hundred million euro to buy its 2 hundred million ordinary shares. According to Barclays’ CEO, they lend these capitals to Algemene Bank Nederland afterwards. Syndicated loans, indeed, do have advantages for banks to gain profits. However, did Barclays even considered the consequence if Algemene Bank Nederland failed to return those large amount of capitals? Regardless of the capital losses for Barclays itself, but the cooperation relationship between these two companies may be break down. Therefore, banks should focus on their long-term strategic viewpoint instead of short-term interests when they raising capital through debts or lend money to borrowers.