European companies scale back financing needs in response to downturn, says survey

European companies are responding to the economic downturn and a tightening of credit conditions by reducing working capital requirements and scaling back capital outlays for growth, both organic and external, according to a survey by Greenwich Associates.

In the fourth quarter of last year, Greenwich Associates interviewed more than 1,000 treasurers and finance directors at large companies in Europe about how their companies are being affected by the double whammy of recession and credit crunch and how they are coping with changing conditions.

The results reveal that companies took quick action to minimize funding needs as access to essential financing was dramatically curtailed in just the few weeks from the start of October to the end of November.

Respondents were asked to describe changes to their level of access to acquisition finance, structured finance, hedging products and financing for capital expenditures and working capital.

'The share of respondents reporting deteriorating funding conditions increases sharply from October to November in all five areas, illustrating how quickly the events of the fall translated into a sharp tightening of financing within only a two-month span,' says Greenwich Associates consultant Markus Ohlig.

Hardest hit was funding for acquisitions, structured finance and capital expenditure, the categories in which the highest percentage of companies reported deteriorating conditions. Also taking a hit was companies' access to financing for working capital, followed to a much lesser extent by access to hedging products.

Funding constraints first began to affect European companies' ability to finance external growth. A significant share of companies was reporting reduced availability of acquisition financing as early as the start of October. About a month later, substantial numbers of European companies began experiencing similar disruptions in their ability to secure financing for internal growth in the form of capital expenditure.

'It is important to note that, at an aggregate level, our research shows no clear sign that balance sheets have deteriorated over the past year,' says Greenwich Associates consultant Robert Statius-Muller. 'The share of companies' credit lines that have been drawn down increased marginally, from 35 per cent in the fall of 2007 to 40 per cent in November 2008.'

European companies are responding to the fast-deteriorating conditions by scaling back financing requirements. The share of companies reporting that they had reduced their need for working capital financing doubled from October to November. Reductions were also reported in acquisition finance, capital expenditures, structured finance and hedging products.

Despite this rapid reaction, the research results suggest that some companies have been caught out by the even more rapid change in conditions. Among companies interviewed in November, 17 per cent reported that they had reduced funding requirements for capital expenditures.

But almost twice as many, 32 per cent, said it had become more difficult to access funding for investments. Greenwich Associates says the fact that this mismatch is consistent across all the five areas of funding suggests that there is a considerable minority of ten per cent to 15 per cent of large European companies that are struggling to obtain essential financing.

The survey also found that banks have begun to squeeze their corporate clients for more compensation for credit. At the end of 2007, only 16 per cent of European companies said they felt pressure from banks to compensate their primary credit providers with additional fee-generating financial business such as foreign exchange trading, advisory services or cash management. That share jumped to 21 per cent in September, to 26 per cent in October and to 29 per cent in November 2008.

'At the moment, companies say they recognize the pressure, but most say they have not been forced to re-allocate other business in favor of lenders,' says Greenwich Associates consultant John Colon. 'That is likely to change significantly in coming months.'