Over the weekend Warner Chilcott announced that it was buying Proctor and Gamble’s prescription drug business for $3 billion. While the size of the transaction is small the entire amount of the deal is being financed with debt. This is important because Warner Chilcott is already a heavily indebted firm with a low credit rating. Because investment banks are willing to step up with billions of dollars of financing, this is a sign that credit markets are loosening somewhat.
Investment banks are run by human beings and frankly, even the institutional investors have been gun shy in the last 18 months. So a transaction of the size described above is an indication that institutional confidence is increasing. For capitalism to work, new ideas have to be financed if they are to become new businesses with new profits. I am certain that there are still new ideas and new businesses wanting to be financed out there. So a loosening of credit is a positive long-term sign that the economy is returning to health.
Jason
PS – I am heading to Jamaica this week and will be incognito. I hope that each of you has a wonderful week!
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