gents, as i suspected, this maybe what is driving all the...

gents, as i suspected, this maybe what is driving all the shorts, it good go for a big slide....

Wesfarm hit by credit squeeze
The chief executive of Wesfarmers, Richard Goyder … $4 billion in debt to refinance.

Vanda Carson
March 19, 2008

THE continuing global credit market squeeze has again intensified concerns about the ability of highly leveraged Wesfarmers to refinance almost $4 billion in debt by October, the company yesterday refusing to deny rumours that it baulked when asked to stump up interest at four percentage points above the cash rate.

The company, which was in the US and Europe on a road show early this month visiting equity and debt investors, denied yesterday that it had lined up a deal but withdrew when faced with the huge increase in the interest rate on the debt.

The $4 billion is the short-term component of the $10 billion Wesfarmers borrowed to buy Coles Group last year.

Market sources said it might have to pay a funding margin of up to four percentage points above the prevailing cash rate, double the two percentage points the company had expected to pay.

At its half year result last month Wesfarmers said it was confident of refinancing the bridging loan at spreads of between 1 and 2 per cent higher than what it was currently paying, even in the challenging conditions prevailing in credit markets.

The Asian financial wire IFR Asia quoted a banker close to the deal saying: "Their backs are to the wall - they are going to have to suck it up and pay up".

If it is forced to pay the higher rate, the increased interest expense could add $280 million a year to its funding costs.

However, the company may be able to reduce this by borrowing only $2.5 billion, making up the shortfall by using its dividend reinvestment plan and surplus cash generated by its coal business, which is enjoying record coal prices.

The chief financial officer, Gene Tilbrook, has previously said he wanted to wait for markets to calm before refinancing the debt, but he has been waiting for three months and there is no sign of a settling of nerves.

A Wesfarmers spokesman, Keith Kessell, yesterday declined to comment on claims that it had been asked to pay four percentage points above cash.

"[Chief executive] Richard Goyder said at the half year result that it's not a question of if but when and how we refinance that debt," he said.

"We have adequate time [to refinance] and an excellent relationship with our banks … and we have no concerns about being able to achieve that within the time frame."

The company is expected to raise finance in the US rather than Europe because it is the only market with an appetite for this debt at the moment.

Financiers who supplied the short-term debt used to buy the Coles Group last year have sought to insure against a possible default by buying credit default swaps which act to offset the risk.

Since Wesfarmers was handed the keys to Coles in November, the price of protecting the debt has more than quadrupled.

Shares in the company closed down 42c at $35.34.