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 today 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 €1.5bn and debt below €500m.
“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”, said 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 €3.5 trillion in debt funding over the next five years. About €2.7 trillion of this relates to refinancing existing loans, with the remaining €800 billion 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, said: “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 5% contribution to the financing requirements of these companies from various alternative funding sources would amount to a meaningful €35 billion 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, said: “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.
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