Europe’s largest companies are reporting fewer problems securing funding for their operations and increasing demand for credit to fund growth-oriented capital expenditures. These and other positive developments revealed in the results of Greenwich Associates’ 2010 European Corporate Banking Study suggest that big European companies are at last emerging from a period of global recession and financial market duress.
However, as these companies transition from survival mode to a more ‘normal’ posture focused on growth, the research shows that changes in bank business models are having profound impacts on the major channels used by companies to meet their funding and treasury management needs.
In addition, efforts at regulatory reform represent a huge question mark for banks and companies alike. Rather than putting their balance sheets to work, banks are retaining capital in anticipation of changes to capital reserve requirements, rules governing their own funding mechanisms, the treatment of derivatives and a host of other critical issues. “There’s no doubt that banks’ uncertainty about these issues is acting as a drag on the recovery in corporate lending,” said Greenwich Associates consultant Tobias Miarka. “But what many companies might not realise is the extent to which the outcomes of these debates will determine how they are able to finance their businesses in the future, and at what cost.”
Positive Signs for European Companies
The study results reveal a series of findings suggesting that large European companies have passed the tipping point and are moving into a period of stronger business prospects and more favourable (or at least less unfavourable) credit markets:
- Reversing the trend that held throughout the downturn, the share of companies reporting improved access to funding for ongoing operations, capital expenditures, acquisition finance, and hedging products is now larger than the proportion reporting increased difficulty in securing such financing.
- Large European companies are reporting less demand for funding for ongoing operations – a finding that suggests their businesses are recovering to the point at which they can now fund operations from cash flows.
- Eighteen percent of large European companies say their need for funding for capital expenditures (capex) is on the rise, versus 12% reporting that capex funding needs continue to decline. These findings represent a reversal from last year’s results, in which 16% of companies said their needs for capex funding were declining and only 7% reported an increase.
- European companies’ borrowing capacity increased slightly from 2008 to 2009 as the share of total bank credit lines drawn down declined to 28% from 31%. That decrease essentially reversed the shift that occurred in 2007-2008, as companies drew down credit lines during the worst months of the economic crisis and credit crunch.
Corporate Finance in Flux
The consequences of the banking crisis and subsequent regulatory initiatives are likely to increase prices that companies pay for bank loans, even when credit begins to flow more readily to companies up and down the spectrums of size and credit rating. Increases in interest rates and fees on bank credit could in turn hasten companies’ shift from their traditional reliance on bank loans to a new and more diversified funding base incorporating much tighter management of cash flows and stepped-up levels of activity in global capital markets. For the largest and most highly rated companies, bond financing has in many instances become cheaper than bank credit – a situation that contributed to record levels of corporate bond issuance in 2009 and is likely hastening a disintermediation of banks as credit providers similar to the one that has already occurred in the US.
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