Three approaches to funding for European SMEs
Since the global crisis, plenty has been written about banks paring back their lending activities and more stringent capital adequacy rules limiting funding opportunities, particularly for higher-risk borrowers such as smaller companies.
This is certainly true for bilateral lending. A study by economists Joseph Noss (Bank of England) and Priscilla Toffano (IMF) from April 2014 presents empirical evidence suggesting that an increase in capital requirements by one percentage point forces banks to cut their total lending in the short run by 1.2% to 4.5% or reduce credit growth by 1.2 to 4.6 percentage points. At the same time, though, the institutional need for income streams, ultra-accommodative monetary policy and the European Commission’s agenda to mobilize more sources of funding for European enterprise mean that sources of liquidity available to small and medium-sized enterprises (SMEs) across Europe are healthier than they have been for many years.
Here, three Commerzbank business heads assess prospects for three core forms of SME funding and how each can be employed to achieve the optimal funding mix.
As bond yields turn negative and investors continue to search for yield, some areas of Europe’s syndicated loans market are booming. Issuance of Schuldschein – the German-originated private debt instrument characterized by its simple documentation – has grown by 50% in the past five years, according to research by Commerzbank, and is now available in at least a dozen countries across Europe.
Alongside a growing pan-European debt funds market, alternative sources of funding are coming directly from institutional investors such as insurers and pension funds. We are also seeing the emergence of the French Placement Privé Européen (European Corporate Private Placement), a cross-over product that addresses higher-risk entities while still offering attractive terms. The investor market for the product has so far been limited to French insurers. But a strong appetite among French banks and the French government to expand its use could lead distribution to open up to a far wider audience.
I outline below some factors that are key to SMEs achieving fair and realistic financing terms in the syndicated loans market:
• Seek out funding that is attractive, but also reliable investors – In a buoyant financing environment, borrowers need to be alert to new entrants offering aggressively priced financing, only to retreat sharply from the market when macroeconomic conditions move against them – a trend that has been evident in many European markets during the years following the financial crisis. If reliable, long-term or recurrent funding is a priority, aim to do business with those banks that have a properly resourced, long-term presence in your market, and a solid track record of supporting smaller enterprises throughout the market cycle.
Lease financing, alongside bank lending, has long been a complementary source of funding for SME capital expenditure requirements. However, in recent years, leasing appears to have been becoming an increasingly important financing source.
Research undertaken by Oxford Economics in July 2015 indicated that over 50% of European SMEs surveyed had used leasing, up from approximately 40% in 2010.
- Christoph Thierolf, managing director, head of mergers & acquisitions
Global merger and acquisition activity in 2016 was 20% down on 2015’s $4.3 trillion-worth of deals. However, it was still the second highest year since 2007. The bulk of this activity was at the larger end of the market. However, mid-cap and small-cap M&A activity is still in evidence as companies seek to take advantage of cash-rich balances sheets, ultra-low interest rates and access to more sources of funding.
The optimal funding solution needs to balance the potential rewards of the planned acquisition with an appropriate level of risk and debt for the acquiring company. In particular, corporates need to be mindful that any debt keeps them within the levels of gearing expected for their sector.
This communication is issued by Commerzbank AG and approved in the UK by Commerzbank AG London Branch, authorised by the German Federal Financial Supervisory Authority and the European Central Bank. Commerzbank AG London Branch is authorised and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority.
Copyright © Commerzbank 2016. All rights reserved.
Commerzbank AGLondon Branch30 Gresham StreetLondonEC2V 7PGTel.: +44 20 7623 8000Frankfurt BranchDLZ Gebäude 2, HändlerhausMainzer Landstraße 15360327 Frankfurt am MainTel.: +49 69 136 44440