Shift towards an American funding model
Early this year we published an article on the shift in Europe towards an American funding model. This American model points the way of funding for corporates in Europe. In the United States the most important elements of corporate funding are based on the debt capital markets and private placements, rather than on bank credit.
In Europe we see that corporates are slowly moving away from traditional bank lending and are looking for alternative methods of financing. There is a shift towards the American funding model. In line with our own conclusion, the chairman of the Dutch Association for Banks has also warned Dutch corporates to reconsider their positions with regards to bank credit and look for alternative financing. However, we think corporates have already taken that path.
The corporate funding shift is the result of a changing attitude towards lending from both the corporate and banking perspective. From a banks’ perspective the financial crisis has severely increased the regulatory focus on the banks’ balance sheet. The banks ‘blame’ new regulation for a decreasing capability of providing credit. After Basel I (1998) and Basel II (2004), banks are now facing Basel III regulation.
The new bank regulation will put the banks on a strong liquidity and capital reserve diet, which means that the leverage potential of banks decreases, which negatively impacts the lending capacity. We believe Basel III is one of the drivers shifting the European funding landscape towards a more market-based model, where corporates strongly rely on non-bank lending.
Next to tougher regulations for banks, there is another apparent trend which is driving change in the funding landscape. Since the credit crunch of 2008, and the financial crisis thereafter, corporates have a more critical attitude towards banking in general. They learned the hard way that their dependency on bank credit is indispensable and their negotiating power is limited.
These hard lessons have pushed large corporates to search for other bank independent methods to secure financing. Next to a search for alternative financing methods like securitizations, factoring and leasing there is also a significant interest in debt capital markets and private placements.
In the figure above we show the landscape of corporate funding and the current shifts we see in the market. A good example of alternative financing methods can be found in Germany where a large market has arisen for retail (Mittelstand) bonds. Smaller organizations, even without a rating, have found a large pool of investors that are willing to buy bonds for tenors up to 10 years.
Zanders is actively working with corporates and banks to investigate and develop a platform for retail bonds in other markets as well. Furthermore, we are currently involved in arranging alternative (non-bank) financing for several clients.
We are very interested in your insights on financing in current markets. If you would like to share your thoughts on corporate funding or want to discuss your financing structure, please contact Bert van Dijk at +31 35 692 89 89 or by email email@example.com.