IS THE ECB being gamed by banks in the new battleground for financing? Or are banks just deluding themselves? I ask because, according to the Q2 euro area bank lending survey, a quarter of banks said that pressure from competition had affected the T&Cs they apply to new loans or credit lines to enterprises. When it comes to SMEs, though, only 8% of respondents cited competition from other banks as a factor, while just 1% cited competition from non-banks and 2% competition from market financing.
I smell a rat, because that doesn’t add up, and it certainly contradicts the narrative you get pretty much everywhere which supports the thesis that alternative channels are now starting to offer viable sources of funding to large and mid-market companies up and down the credit spectrum.
The list includes private placements; bilateral or brokered direct non-bank lending (by credit funds, hedge funds, private equity firms, insurance companies, pension funds and mutual funds); Schuldscheine; CLOs; minibonds; secured and asset-based solutions; and P2P lending/crowdfunding; as well as high-yield and unrated capital markets issuance.
“Banks are now finding themselves in competition to finance projects and asset classes that just a few years ago they utterly dominated,” Bill Blain, head of capital markets at Mint Partners, noted in his morning note the other day. “A large investment-grade flag-carrying airline is giving us the chance to build a syndicate of non-bank lenders to compete with the traditional aviation banks for a multi-billion new aircraft financing”. (He’s also out, incidentally, with deals for UK asset-based farm lender AFP and real estate investment manager Aeriance.)
THE SKEW OF opportunities sought by alternatives may typically be towards the yieldier end of the spectrum, but pretty much every banker I speak to is in the flow of the broad narrative. The ECB commentary tells us “the use of alternative finance continued to have a dampening effect on the net demand for loans to euro area enterprises. In particular, firms’ internal financing sources and the issuance of debt securities by enterprises contributed negatively to loan demand”. There’s surely a disconnect between that comment and the survey returns.
For an example of the growth of non-bank finance, look no further than the European high-yield bond market. From humble beginnings before the financial crisis, the market grew two and half times in size from 2009 to 2010, maintained its levels before doubling again between 2012 and 2013, and then hit a record US$158bn last year.
The European CLO market is also finally seeing growth, albeit from a low base. YTD issuance as of end-August was close to €10bn via 25 issues. AUM stood at just over €67bn, according to Thomson Reuters LPC. Speaking to that yieldier end of the spectrum comment I made above, the ratings sweet spot for European CLOs is notably lower than that of their US counterparts. LPC notes that where almost two-thirds of US CLO loan holdings are rated B1 and above, the number is just 39% for European CLOs, which have around a third of their holdings in the B2 bucket and 15% in the unrated space.
For an example of the growth of non-bank finance, look no further than the European high-yield bond market
WHILE I’M IN debunking mode, dare I discredit another closely-held myth? Everyone blithely quotes that 80/20 stat, i.e. 80% of US corporate funding comes from the capital markets and only 20% from banks, whereas it’s the reverse in Europe. I’ve been meaning to run some numbers on this for some time and finally made a start in the past few days.
First of all, US small-caps do NOT raise funds from the capital markets. They source it from banks, just like they do in Europe. To get a broader sense of comparison, I looked at European vs US corporate access to capital markets. I was slightly blown away by the results.
How many UK and European borrowers do you think have tapped the bond market since the beginning of 2014? Around 500, according to Thomson Reuters. I reckon that’s a pretty good proxy for the growth of market-based financing. If you include the alternative options I’ve listed above, you can add another couple of hundred names that have raised securities, quasi-securities or non-bank finance. So let’s call it 700–750.
What’s the equivalent number of US companies that have tapped the bond market over the same period? It’s 900-ish, according to Thomson Reuters. Adjust for US PP and other sources and let’s call it, say, 1,200 as a guesstimate. Of course the past 20 months is just a snapshot and needs to be adjusted to take account of a larger universe of infrequent US issuers that fell outside my sample period. But my point is: the difference isn’t that big.
At a roundtable I hosted recently on financing and advisory, Jim Esposito, co-global head of the financing group at Goldman Sachs, said: “I don’t think we need to be defensive in Europe about the state of the capital markets currently … The vast majority of the capital markets … are doing absolutely fine and stack up quite well against any comparison to the US”.
Defining the size of the mid-market between countries and coming up with relevant sample sizes and reliable comparative statistical returns and overlaying that against capital markets issuance is tough, as it depends so much on company demographics. But on the basis that the US Census Bureau lists around 23,000 enterprises with revenues of between US$50m and US$500m and one private database I looked at had close to 6,000 listed US-headquartered companies with revenues of US$500m and higher; put it this way, 80% of those ain’t tapping the capital markets.
