The corporate treasurer of one of Europe’s largest companies lets out a long sigh: “We are working very, very long days. These are as tough times as anybody here can remember.”
Refinancing of debt has become one of the biggest worries of companies across continental Europe and the UK. Companies most reliant on short-term financing find themselves squeezed while those who took a conservative stance are reaping the rewards. “The liquidity crunch is a real challenge for companies in the real economy,” says the treasurer of another large European group who did not want to be named.
Dominik Asam, chief executive of Siemens Financial Services, the finance arm of the German industrial conglomerate, says: “Obviously the markets overall are extremely difficult. It is nearly impossible to refinance at attractive rates.”
“We had a conservative financing policy that may have cost us a couple of basis points in the past but now it brings us [into] a very good position.”
Treasurers say there are still tactics to cope with the squeeze. One says his company has relied on a global liquidity network in recent years, with colleagues in Asia and the US supplementing those in Europe: “We also have a continual dialogue directly with investors rather than through the banks so it reduces our dependence on banks.”
Another treasurer says the key is to use the markets opportunistically and aggressively. His company secured long-term credit lines about a year ago that “come in very useful now”. Siemens said it also took advantage of demand in the commercial paper market – which is used by companies to fund day-to-day operations – last week to carry out an issue of more than ˆ100m at 300bps under Libor, the interest rate usually used in such deals.
The European commercial paper (CP) market is smaller than the US market, at $823bn, and European companies rely on it less than their US counterparts. But bankers say liquidity has deteriorated in that market and while better-rated borrowers can still refinance their short-term debt, price of funding has risen. One treasurer said: “Commercial paper for a few days is liquid. But what companies find challenging is to find liquidity for six, nine, 12 months or even more.”
Analysts at ING examined companies with the highest percentage of debt maturing this and next year relative to market capitalisations. They found five companies have to refinance more than their entire value by next year’s end. One, German retailer Arcandor, has already made a drastic plan for fresh capital by selling one of its most profitable divisions and gaining a new large shareholder. BMW, in the list for debt maturing this year, insisted through its chief executive at the Paris Motor Show it had no difficulties this year in spite of the difficult conditions.
A potential headache for banks is that this will lead companies to fall back on pre-agreed revolving credit facilities – which act like overdrafts – which provide cheaper funding than available now in other markets.
The risk of a wave of companies drawing down on backstop facilities is of increasing concern to bankers. A potential headache is many such facilities will have been agreed before the worsening in credit conditions at a fixed rate over Libor – a rate that may now be lower than a bank’s total cost of funding.
Bankers talk to borrowers about meeting them halfway if they want to draw down these lines. Companies face the threat of their banks triggering a so-called “market disruption clause”. This allows lenders to switch the rate at which they lend to a company from a Libor-based price to a level representing their true cost of funds.
Depending on the deal, it requires approval by at least a third of the syndicate and also requires banks to disclose what they believe their own cost of funding to be – something they have hitherto resisted
Some treasurers have been mitigating risks. BT said it has issued £4.3bn of long-term debt since June 2007 to minimise refinancing risk and ensure it is not reliant on short-term paper in these difficult markets. Tesco has £1.4bn of commercial paper outstanding – backed by an undrawn revolving credit facility and is also holding cash deposits. “We are currently issuing CP in both Euro and dollar markets and have found that pricing has drifted upwards but are still getting £20m-£50m away a day,” said Nick Mourant, Tesco group treasurer.
By Richard Milne and Anousha Sakoui |
