When is debt due?

By Colin Nicholson

During the global financial crisis of 2008 and 2009, we have seen it become very difficult to borrow money, especially from banks. In fact, for a while many banks were not prepared to lend to each other, let alone to commercial businesses. There were several reasons for this, but the underlying issue was the fear that banks may be holding toxic assets and could fail before loans to them were repaid.

This is when it becomes important to know when outstanding borrowings by a company will fall due - if the debt is due before the crisis is over, then the company may fail because it is unable to either repay its debt, or more likely, is unable to renegotiate the term of its loans.

In this circumstance, many companies found the only way out was to sell more shares to raise the capital needed to repay the loans. When a company is in this position, potential new investors will be aware of the higher than normal risk and demand a large discount on the current market price for the company's shares. Especially where the new shareholders come via a placement, this will severely dilute the interest of existing shareholders, who paid far more in the past for their shares.

So, one thing that is important to try to establish is when the company's debt falls due. For some companies this is relatively easy, because they have disclosed it to shareholders in their interim or annual reports. Other companies may have disclosed it in presentations to the market, media, shareholders or analysts, which announcements are available on the ASX website.

If a company has not disclosed their profile of debt maturity, there is nothing to be lost by asking the company on the telephone. If the company refuses to tell an investor or a prospective investor what they ask, it then falls back on the shareholder to make a judgement about the situation, taking into account all the available information.

Colin Nicholson's books: Building Wealth in the Stock Market and The Psychology of Investing may be purchased from Colin's website www.bwts.com.au and good bookstores). Contact Colin at colin@bwts.com.au or through his web site where you may join the list to receive his free email newsletter.