Medium-sized European companies – accounting for around one third of the region’s economy and employment – are likely to struggle to meet their multi-billion financing needs in the next few years, as banks reduce their lending to the sector, according to Standard & Poor’s Ratings Services.
S&P has launched Europe’s first credit benchmark aimed specifically at helping increase the transparency and comparability of mid-sized companies from a credit perspective, which may help facilitate access to new sources of capital market funding. “Mid-Market Evaluation” will target companies with revenues below EUR1.5bn and debt below EUR500m.
“European businesses have traditionally relied on bank funding, but deleveraging and tightening regulation are creating a scarcity of finance for European companies, and the problem is particularly acute for medium-sized businesses,” says Alexandra Dimitrijevic, managing director, Standard & Poor’s. “While larger corporates have easier access to finance and much smaller companies are the focus of a variety of policy proposals, medium-sized businesses or the ‘squeezed middle’ appear to be falling into the gap between them.”
The scale of the problem facing this squeezed middle of the corporate sector is significant. S&P estimates that European medium-sized businesses will need to raise up to EUR3.5trn in debt funding over the next five years. About EUR2.7trn of this relates to refinancing existing loans, with the remaining EUR800bn needed to support capital investment and expansion plans between now and 2018. This equates to about a third of total debt currently owed by non-financial companies in the region.
Tim Ward, chief executive of the Quoted Companies Alliance, says: “Lack of independent information and comparability is often cited by our members and their advisors as a barrier to gaining greater access to debt finance from institutional investors. In this respect, Standard & Poor’s new Mid-Market Evaluation should be extremely useful.”
To ease the funding pressure facing these companies, new mechanisms are being developed in Europe to channel funding from investment and other non-bank institutions, including the nascent but growing European private placement markets and the launch of new bond exchange platforms in countries like France, the UK, Italy and Spain. Even a five per cent contribution to the financing requirements of these companies from various alternative funding sources would amount to a meaningful EUR35bn each year. However, despite a growing interest from institutional investors to invest in this new asset class, they are often deterred by the lack of transparency of the credit risk of mid-sized debt issuers.
Colin Tyler, chief executive of the Association of Corporate Treasurers, says: “Large companies have been raising significant amounts of new funding in the international bond markets but this has been more difficult for mid-sized companies where smaller issue sizes and lack of clarity on credit risk have discouraged investors. Standard & Poor’s new Mid-Market Evaluation is therefore a welcome development and one which should stimulate mid-market issuance across Europe.”
A Mid-Market Evaluation offers an independent view of mid-size companies’ creditworthiness and the drivers behind this assessment. For potential investors, Standard & Poor’s believes that it offers a valuable aid in supplementing their own credit analysis and providing comparability across the mid-market sector on a common, purpose-built scale. For mid-market companies, it may help to widen the investor pool, help competitive borrowing and streamline the funding process by increasing transparency and providing a common benchmark on creditworthiness.
