There’s not a lot new about the fact that German corporates need to think about reassessing their funding mix, but a new survey by Siemens Financial Services suggests that their best ideas about how to go about this are not good enough.
The survey compares the experiences of 500 large Mittelstand companies and SMEs in Germany, France, the UK and US with an annual turnover of more than e50 million, the sort of companies that, in theory, should have all types of financing available to them.
The study reveals that two-thirds of the German finance directors surveyed plan to tap new financing resources in the coming year, far more than their counterparts in the US or UK. Yet two-thirds also think that corporate financing will become more difficult over the coming year. In particular, some 64% of the smallest German companies surveyed expect to face problems compared with just 18% in the UK.
More worryingly, the funding solutions they come up with are inadequate to address their needs. German companies seem to have lost faith in the ability of capital markets to solve their problems, despite last year’s survey predictions of an increase in the use of bonds and receivables securitizations. Even though many companies are worried about their debt to equity ratios, tapping the equity markets or receivables ABS are way down the agenda. Unsecured bond market issues are not a favoured solution either.
German finance directors imagine that the leasing and factoring markets are the most promising alternative form of financing. The survey, however, concludes that while these may provide off-balance-sheet financing, these inter-company financing techniques are not going to solve German corporates’ pressing balance sheet issues.
And given that the survey finds 32% of German companies put their financing requirements at over e100 million in the coming year, compared with 16% of US companies, these techniques will scarcely make a dent in their needs. “Apart from leasing and factoring, they do not identify any promising financial instruments,” the survey says. “Since these instruments cannot cover all financing requirements, the overriding impression is that German financial decision-makers are at a loss.”
German companies are making some of the right noises. The survey finds that the number of German corporates that prioritize reducing their cost of funding has shrunk this year from 77% to 50%. Instead, there is a new emphasis on liquidity and the long-term availability of financial resources.
Indeed, some of the German companies surveyed are already diversifying their funding. Paul Hartmann, a German manufacturer of medical and hygiene products, relies on seven house banks, which provide the company with medium-term financing over three to five years.
Public bond financing is rare, as only 46 German companies have a Moody’s rating compared with the US where more than a quarter of all the corporate liabilities of the companies surveyed were financed through bond issues. However, Paul Hartmann has just made a first move towards a bond issue by including key figures required for the process to secure a public rating into its accounting system. “We may undergo a rating process next year,” says Hans-Peter Wagner, finance director.
And even though agricultural manufacturer Claas is unrated, it recently became the first German company to tap the US private placement market, which it did on more favourable terms than it could in the public euro market. “With a maturity of 12 years, the loans are very long term and enjoy conditions that currently cannot be attained in Europe,” says Rüdiger Günther, chairman in charge of finance and accounting, mergers and acquisitions. The company also sells receivables through ABS structures, through which it can tap up to e100 million of funds.
Decrease reliance But while the companies surveyed acknowledge the need to decrease their reliance on bilateral bank loans and diversify funding, few have even started to restructure their liabilities. One of the most telling findings of the survey is the equity gap between US and UK corporates and German corporates. UK and US companies have average equity ratios of over 50%, compared with 29% in Germany.
Yet at the moment German companies’ equity resources are dominated by capital deposits and few are planning new equity issues. The survey concludes that companies need to procure fresh equity capital as soon as the market picks up or private-equity firms are ready to invest again. They also need to look to the US for ideas about how to implement large-scale employee participation schemes.
The survey finds that there are funding opportunities available for German companies and equity financing and the number of foreign banks pushing new product ideas in Germany are cited as examples. But it concludes that, overall, German companies need to invest more time and thought to figuring out what their options are in order to secure financing in the future.
