Financial management : Question 1
How can spinning off a division increase the overall debt capacity of the group?

I’m not sure that spinning off a division can really increase the overall debt capacity of the group by much.

It is true that bankers prefer to have shares in a subsidiary as collateral for a loan, rather than assets, because it’s easier to sell shares than to sell assets. Furthermore, by lending to a group that is organised into subsidiaries, the visibility of the sources of the group’s earnings is much clearer (each subsidiary has its own accounts). Otherwise, all of the earnings just go into one big melting pot.

Finally, it is sometimes possible to get the better of some bankers who may not be very astute, by getting them to lend money twice – once to the parent company and once to the subsidiaries. But they really have to be very dopey bankers and it may not necessarily be in the interests of the company over the medium term, as the bank will work out that it’s been taken for a ride at some stage!

For more, cheek out chapter 45 of the Vernimmen.