Financing of Dutch Publicly Listed Firms During the Economic Crisis

Before the banking crisis began, directors of publicly listed companies were pressured by banks to increase their financial leverage. Advocates of leverage reasoned that publicly listed firms should create value in the same way as private equity investors, by financing with debt. A majority of bankers were advocates of this reasoning.

Most Dutch companies did not succumb to the pressure of the banks and maintained a conservative financing policy, which resulted in a solid financial position after the crisis. Conclusions in this article are based on our research on all non-financial AEX, AMX and AScX (Dutch stock exchanges) firms between 2006 and 2009.

Balance Sheet Composition

Before 2008, Dutch companies made significant investments in fixed assets. The share of intangible fixed assets of the invested capital has increased significantly due to large acquisitions, such as Scottish Newcastle by Heineken, ICI by AkzoNobel, TeleAtlas by TomTom, Vedior by Randstad and Choice Point by Reed Elsevier.

The net working capital also shows a strong trend, where net working capital annually decreased from €9.8bn in 2006 to €1.8bn in 2009 (see Figure 1).

Figure 1: Balance Sheet Developments on AEX* (= AEX excluding ArcelorMittal and Royal Dutch Shell), AMX and AScX Firms


On the liabilities side, we see that the emphasis is placed on long-term funding: equity, mezzanine (hybrid capital) and long-term interest-bearing debt. The choice for long-term funding can be explained by the nature of the invested capital: a significant amount of goodwill and negative net working capital. After a decrease in 2008, group equity showed signs of recovery in 2009.

Development in Shareholders’ Equity

The increase in equity in 2009 was caused by a change in trend in both dividend distribution and share repurchases (see Figure 2).

Figure2: Dividend Paid and Share Repurchases


Until 2008, most companies followed a dividend policy that promised their shareholders either a higher or stable annual dividend. In 2009, the majority of the companies announced a lower dividend distribution. Also, companies have reintroduced the option to shareholders to choose between a distribution in either stock or cash.

A similar pattern is illustrated by share repurchases. Until 2008, share repurchases were at the height of their popularity among listed companies, with a significant amount of shares repurchased. In 2009, all share repurchase programmes were cancelled with the exception of KPN.

Finally, a number of companies had to strengthen their equity position by issuing new shares. Examples of this include Heijmans, Ordina and Wavin.

The increase in equity in 2009 has increased the solvency of the companies from 36% in 2008 to 40% at the end of 2009. This brings solvency back to the previous levels of 2006 and 2007.

Development in Interest-bearing Debt

In 2009, companies reduced their portion of bank financing by 30%. Great differences were found between AEX and AMX/AScX companies, however.

The AEX* companies show a slight decrease of 5% in total outstanding interestbearing debt in 2009. The proportion of bank financing with these companies is limited, and this limited proportion was further reduced in 2009 as firms increased the proportion of capital market funding.

The AMX and AScX companies are highly dependent on bank financing. Just a small number of firms use debt capital market instruments. Within this select group, Vopak by far uses the most debt capital market instruments, and was responsible for the increase in total capital market funding of this group in 2009 (see Figure 3).

Figure 3: Composition of Interest-bearing Debt


The earnings before interest, taxes, depreciation and amortisation (EBITDA) of the companies monitored decreased by 12% in 2009. Because of the decrease in interest-bearing debt, the net interestbearing debt to EBITDA ratio increased only slightly from 1.66x in 2008 to 1.73x in 2009. Because operating income (EBIT) recovered in 2010, this ratio will further improve. In 2007, before the large acquisitions in 2008, the net debt to EBITDA ratio of 0.60x was at a very conservative level.

Financing Risks

The net debt to EBITDA ratio is the most frequently applied financial covenant. In order to monitor the availability of financing it is crucial to have a good view on the financial covenants that companies should comply with. A (potential) breach of these financial covenants could result in financial distress and plummeting share prices. Other indicators of financial distress include the liquidity position and the spread of the debt redemption/financial obligations (maturity profile).

The AEX, AMX and AScX combined have used less than 20% of their existing credit facilities. This is particularly the case with AEX companies, who seem to use their credit facilities more as a liquidity instrument than as a permanent source of funding. The available headroom under credit facilities combined with cash and cash equivalents, reflects the strong liquidity position of the majority of publiclytraded firms (see Figure 4).

Figure 4: Liquidity Position of AEX*, AMX and AScX Companies


A refinancing risk can occur when the maturity profile of a company’s debt obligations is not well spread over time, and is concentrated in the short term. This risk is generally not described in annual reports. Just 24% of the companies provide an annual maturity profile in their annual report. The remaining companies only disclose a high level redemption profile, where they use different categories such as one and three years, or between one and five years. These categories are not detailed enough to observe any concentration risks.

Two-thirds of the credit facilities were disclosed with a maturity date. The maturity profile of credit facilities reveals a concentration of refinancing in 2012, a so-called ‘wall of debt’. This peak does not occur in outstanding debt capital market instruments. These instruments provide long-term funding, where most outstanding debt capital market instruments will not mature before 2014 (see Figure 5).

Figure 5: Maturity Profile of Credit Facilities and Debt Capital Market Instruments


Given the strong balance sheet and significant liquidity position, the ‘wall of debt’ should not cause any major problems for the companies monitored here. In particular, companies with access to capital markets will not experience any major difficulties. However, it will be interesting to observe whether banks are willing to continue provide large headroom under credit facilities maturing in the coming years.

Outlook for 2011

Four themes stand out for 2011:

  1. In anticipation of the so-called ‘wall of debt’ in 2012, we expect significant refinancing activity to continue in 2011.
  2. We foresee an increasing demand for alternative funding sources to reduce the dependency on bank debt. New legislation, such as Basel III, will not contribute to the expansion of the supply of bank financing in the short term. Companies that rely heavily on bank debt will experience a higher risk.
  3. Companies will have to decide how to manage their strong balance sheet and liquidity position effectively. Will the available funds be used to finance growth, or will dividend payments to shareholders and share repurchases be increased?
  4. Shareholders will require more transparency on the financial strategy of the company. What is the current financing structure and what terms (e.g. financial covenants, securities, etc) have been agreed with banks and other funding sources? What is the desired capital structure of the company? How does this link with the selected strategy and dividend policy?


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