Shareholder returns can come from profit, or selling off assets, or taking on loans, or underfunding pensions, or probably other ways financial experts can invent.
Maybe not today or this year or next year, but everyone is always going to want a return on the money they put in, whether it be owner or lender.
Or run a nationally important service into the ground and then need emergency government money to keep providing it.
There is the difference
They must have used the debt to finance operations, as opposed to cutting the dividend or even putting more money in.
This allowed them to continue to have profits in the short term, at the expense of higher interest costs in the long term (which probably cause higher prices for customers in the long term).
Of course they will! There's an entire industry (leveraged buy outs) built around it. And more generally, lenders will let you do dumb things with the money they lend you. As long as they expect to get paid back.
So, could a small business borrow money to pay it's owners? Probably not, it's not likely to get paid back. Could a multinational corporation borrow money to pay dividends? Yes, it's happened.
Instant Brands went bankrupt because it could not pay its debts in a timely manner, so lenders decided to take the collateral.
It is possible lenders did not do sufficient due diligence, or maybe they got unlucky, but they did not lend Instant Brands money specifically so Instant Brands’ owners could pay themselves (maybe they did if there was corruption in this case, but it is not the norm otherwise why would anyone lend to anyone?).
And of course, Instant Brands’ owners will lose equity and credibility in the bankruptcy, so it is not like any dividends made possible due to the financing were “free money”.
It's just fancy accounting talk for theft. A shell game. Like u/Spooky23 states upthread.
It's wrong. It doesn't make any sense. And yet here we are.
Water company does a debt bond issue, parent owning fund takes a % of the issue (enough so that the bond issue is a success at a good price), parent fund extracts all the funds raised as a dividend, and sells the % of the issue it own too
All while extracting management fees etc too
Without getting into the weeds, my point was that in order for owners to end up with cash in their pocket, the business has to earn a profit, at some point. And that profit must come from revenue (higher prices for customers) minus expenses (lower quantity/quality for customers).
You can insert a lender in there to shift when those cash flow changes happen, but the money must come from customers, eventually.
Barring any research and development that results in technology that will allow for lower expenses and/or increased production, but I do not think that is the case here.
Of course what happens is many business geared this was don’t make a profit, fail their banking covenants, interest on the bond rises and eventually they go bust leaving lenders out of pocket the fund in the money with the dividends
It’s happened to many PE owned businesses
When does profits don't materialize, the company goes bankrupt, the government rescues it (can't just cutoff power and water!) and everyone is happy! Well everyone but the majority of taxpayers who aren't also shareholders of the utilities...
There's this thing called a "leveraged buyback" where a company borrows money from lenders and uses that money to buy back shares.
- buybacks are taxed when a person gets money for their shares, as capital gains tax
- lots of corporate tax is about exactly the opposite of what you say; i.e. reaching inside a company's bank account and taxing its profits directly, rather than waiting for the money to flow out and taxing it as VAT/income tax/cap gains. A huge amount of money and effort is spent on balancing this correctly, with R&D credits, structuring profits to appear in the correct year, etc etc.
It's the shareholders cashing out, so rather than a failed business with shares of $0 value, they have money and the loans are someone else's problem.
What about using revenue to buy it? You don't have to use (or have) debt to buy something with revenue.
So you could still be giving away money to cash out that is owed to someone else? If your revenue is based upon fictional income then these privatised public services will become tax payer problems because they can't be shut down.
> buybacks in any other fashion only increase debt.
When the board is more like a group of Huns than a Shepard, you find that after you pay out the shareholders, the enterprise is toast. In some cases, like most recently in big box retail, the private equity investors are running an obvious and odious, but legal, fraud.
With utilities, the business is all about capitalization and cash flow. They should be stable and boring businesses. When they are exciting, the management is burning the candle at both ends.
if it's on the balance sheet and you sell it for more than it cost you, then you have to book it as non-operating income, i.e. capital gains, i.e. profit.