Developments in Corporate Lending
The financial media are full of buzzwords such as ‘Greek default’, ‘euro crisis’, ‘recession’, ‘liquidity shortage’, ‘Basel III’ and ‘credit crunch’.
The financial world seems to be – metaphorically – on fire. So, how is your organization making sure it is well equipped for a recession? And just as importantly: how do you structure and finance your balance sheet in these markets?
Since 2009, we have seen European corporates gradually shift away from bank-lending towards alternative lending such as the public and private debt capital markets. Large corporates were already familiar with extracting funding from these markets, but mid-caps are now also approaching these markets for structural funding. We see that even new markets have been created to connect the mid-cap borrowers and investors. The renewed focus on the Schuldscheine market (Mittelstand (mid-cap) bonds) is a good example that shows that smaller companies are looking for non-bank funding and, more importantly, there is an appetite among investors to provide funding to these companies.
The shift towards non-bank lending can be explained by a change of corporate focus from optimizing financing costs to securing availability of funding. This is caused by several developments. From a bank perspective we see a contraction in available credit due to a worsening macro-economic climate. Banks are more reluctant to provide longer-term funding and require more guarantees in exchange for funding.
Furthermore, the upcoming Basel III regulation puts pressure on the required capital base of banks, which has a direct negative implication for available liquidity on banks' balance sheets. Corporates that are experiencing this ‘closing credit door’ with an increased demand for guarantees, are intensively searching for other sources of finance. Next to the debt capital markets there is also a focus on the liquidity that is ‘locked in’ on the asset side of the balance sheet.
With these developments in mind, one can argue that Europe is heading more towards the US system, where banks only provide undrawn revolving facilities to corporates and debt capital markets provide the variety and opportunities for corporate funding. This paradigm shift, from an European standpoint, should be an important element on the agenda of the CFO and treasurer.
Balance Sheet Management
In advising our clients on any funding-related or risk-related matter, we take a so-called ‘balance sheet approach’. Next to corporate strategy, which should be the most important determining factor of the structure of your balance sheet, we identify those factors that have an influence on the structure, cost and flexibility of your balance sheet. This approach is presented in the figure below.
This approach takes into account the risks companies face in both the internal and external funding decisions of their balance sheets. This is not a mere focus on debt and/or equity portfolio, but a focus on the interrelatedness between assets and liabilities, the financing value of the asset base, the credit- and liquidity risks that companies are facing and the composition and time value of working capital.
We believe that these times of economic uncertainty and unrest in financial markets provide the challenge to evaluate the fit between corporate strategy and the current balance sheet composition. Is your balance sheet and your funding structure strong enough to promote your strategic goals in the upcoming months and years?
If you want to elaborate on this question, please feel free to contact Bert van Dijk on +31 35 692 89 89 or by email email@example.com.