Investment grade corporates, use your refinancing window!
The effects of the credit crisis on corporate funding options have often been discussed. The general message is that it has become much more difficult for companies to attract bank financing since the start of the crisis in 2008. This is mainly due to worldwide deleveraging by banks, fueled by new regulations such as Basel III. However, these developments have also created an interesting opportunity for European investment grade corporates.
Basel III imposes many new regulations on banks in order to reduce the risks they face. The general idea behind these regulations is that more risky financing arrangements provided by banks will have to be offset by ‘safer’ liabilities on the banks’ balance sheets, such as tier 1 equity and additional capital buffers. This means that riskier financial arrangements will be more expensive for banks to provide. Furthermore, it limits the banks’ room for providing funds because these ‘risky arrangements’ take up more of the banks’ balance sheets due to the additional capital buffers they require. In short, banks want safe investments.
Safe investments from a bank’s perspective include funding corporates with high credit ratings. They specifically target investment grade corporates (with a credit rating of BBB- or above) because this is quite favorable with regards to the effects of Basel III.
Unfortunately for the banks, corporates’ demand for bank funding has diminished over the past few years.
The credit crisis has opened their eyes and has led them to rethink their funding strategy. This means that a lot of corporates have started to deleverage as well and are adopting a granular funding approach, where they aim for different types of funding sources to reduce their risk. So their total funding appetite has diminished and what is left is divided over several different funding alternatives.
As a result, banks are all looking for the same safe investments. But a relatively small pool of European investment grade corporates are actually looking for bank financing. This means that banks have to be more competitive in order to win a place in the financing arrangement of the investment grade corporates. This competition inevitably has a favorable effect on the pricing the banks are willing to offer.
I have been surprised by the low pricing recently offered by banks to investment grade corporates in the Netherlands. In my opinion there is an interesting window of opportunity for such companies all over Europe at the moment to arrange relatively cheap bank funding. So why not repair your roof sooner rather than later, and take a look at your refinancing possibilities now that the sun is shining?