The trend toward acquisition activity in i want to earn money without investment the lead-up to the financial crisis (including Rio Tinto's purchase of Alcan) was reversed in 2008, with a couple of large resource companies selling assets for capital management, including paying down debt.
Many companies used these cash holdings to undertake balance sheet adjustment.Net interest paid, interest paid less interest income.Many corporates have also sold assets and cut dividends, using the proceeds to repay debt.The latest available data are for the first half of 2009.Equals: Net change in cash.In the most recent half year, however, there was a small fall in physical investment, mostly driven by retailers, likely reflecting the uncertain environment.Graph 10 While real estate companies were traditionally considered to be a defensive investment that paid stable dividends, many have needed to change their dividend policy recently.Some smaller resource companies' operations are confined solely to exploration, while the larger, more mature, companies often undertake a mixture of exploration and production.Equity raisings have historically been offered at a discount to market prices, with the discount typically higher if the raising is large relative to the company's existing market capitalisation.Sources of Funds, prior to the onset of turbulence in financial markets in mid 2007, around two-thirds of all corporates' funding was derived from internal sources that is, cash profits from operations with the remainder sourced externally from banks, debt markets and equity markets.This underpinned their high payout ratio around 90 per cent of profits compared with a little over 50 per cent for other listed corporates.In general, the corporate sector is in good financial shape, with many companies having reduced leverage.
While internal funding generated from companies' operations cash profits was resilient, companies worked to reduce leverage and scaled back their use of external debt funding as interest margins widened.
The average gearing ratio the ratio of the book value of debt to equity for these companies increased from around 55 per cent in 2000 to around 100 per cent by mid 2007 (see Graph 5; gearing is discussed further below).
More recently as investors have become more optimistic about the outlook and conditions in financial markets have improved, market reports have suggested that a pick-up in M A activity may be imminent, though only a few large transactions have been announced to date.Graph 7 This slowing of net investment has been particularly evident for non-resource companies (discussed further below while resource companies' investment has remained above the average of the previous five years (the spike in the second half of 2007 reflects Rio Tinto's purchase of Alcan.Some of these companies are still in the process of restructuring their balance sheets, including by negotiating the sale of assets to reduce gearing.Resource companies in particular increased their cash buffer with cash balances increasing to 10 per cent of assets at end June 2009 though this largely reflected their ongoing robust cash profits (Graph 11).While intermediated borrowing has declined, this has been partly offset by corporates tapping the bond market as wholesale market conditions improved in 2009.Resource companies account for just over one-half of listed corporates' market capitalisation, and around one-third of assets and debt.During the financial crisis, the flow and composition of listed corporates' sources of funds changed noticeably as corporates responded to evolving economic and financial market conditions.The bulk of resource companies investment expenditure continues to be directed toward physical assets that maintain or increase productive capacity, such as building mines and purchases of other mining-related infrastructure.Graph 11 Conclusion After a period of heavy debt raisings, most of which was used to fund acquisition activity, companies have responded to the evolving economic and financial conditions by reducing their use of external funding, and changing its composition from debt to equity.Debt also became more difficult for corporates to access, with banks tightening lending standards and bond markets effectively closed to some issuers.
Other corporates reduced dividend payments by around 15 per cent.
While resource companies increased dividends over the 2008/09 financial year, this was driven by a pick-up in distributions in the December 2008 half, underpinned by quite large cash balances and good profitability.
These acquisitions can be thought of as usually being more discretionary in nature.