Access to finance is one of the greatest risk for CFOs
Risk: The availability of finance has been an issue for business for five years now
The credit crunch and sovereign debt crises have introduced the world to a new order of magnitude in financials. The depression era aphorism, “a billion here, a billion there and pretty soon you’re talking about real money” holds little sway when the Greek bailout alone has eaten up north of €320 billion.
The UK Treasury at one point had committed somewhere near £1,200 billion to bail out the banks and US national debt is getting close to $16,000 billion.
So here’s an even more impressive number for you: $46,000 billion. That’s the amount Standard & Poor’s claims is the global “credit overhang” – the amount of money corporates will need to raise between 2012 and 2016 to cover maturing debt, required capital expenditure and working capital. In the euro zone and UK alone, $8,600 billion is needed just to refinance existing debt maturing by 2016.
With the banks all but closed for business this could be problematic. And it’s the reason access to capital is a stubborn feature of Ernst & Young’s global risk survey.
“This is an issue that’s been around for a while now,” says Mark Gregory, chief economist at EY. “The structure of the European banking sector, its reliance on wholesale lending and use of sovereign debt has knocked banks back.”
Gregory says the long-term refinancing programme shored up the banks, but it also encouraged them to buy more sovereign debt. “So with the governments’ fiscal positions and the bank balance sheets where they are now, there’s a huge economic squeeze – and that’s created this vicious circle of limited access to credit,” he adds.
With Spain on the brink of further bailouts and Greece teetering on the verge of implosion, this risk doesn’t look like getting any easier to mitigate. If only everyone could be as phlegmatic as the finance chief of a heavily leveraged global brand who said: “It’s too big to be worried about. The financing markets aren’t clear right now, and they’re not well priced. It’s harder and more expensive to grow. But we’ll find a way.”
The irony is that many corporates are sitting on large cash surpluses, which segments the risks around access to finance. Unfortunately it means small and medium-sized companies and capital-hungry manufacturers and infrastructure businesses are the ones having to deal with it most acutely.
In the EY top 10 risks survey two of the three drivers of this risk were capital for major investments and perceived unattractiveness of the respondent’s sector.
“It’s a catch-22 situation,” says Trevor Williams, chief economist at Lloyds Banking Group.
“The banks are desperate for quality borrowers – and are pricing finance down to attract them. That’s pushing up the price for more risky businesses. Then you have big borrowers – the ones earning a reasonable margin for the banks – paying down debt at the rate of 5 percent a year, by some estimates. So there’s a double squeeze.”
The other problem banks are facing is regulation, which many consider to be a self-inflicted wound. But new capital adequacy requirements combined with internal pressures on return on equity are throttling the customer businesses most in need.
“Banks look at the returns on risk-weighted assets,” explains Avni Shah, assistant director in EY’s capital and debt advisory.
“For them to meet their hurdles with SME clients – where there aren’t any ancillary activities generating fee income – the cost of the additional risk gets passed on. A big corporate with M&A, tax and treasury activities with a bank is subsidising their own cost of borrowing.”
Shah also points out that Basel III will push banks towards more short-term funding to allow them more control of their capital base.
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