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The lack of willingness by banks to engage in lending, which is how the story is broadly articulated, is only part of the story, though. Banks in some countries in peripheral Europe in particular are not in a position to be able to fund their corporate clients. Elsewhere, it’s as much the flip side: clients lack the confidence to unleash capital investment programmes in a climate of poor growth and low inflation even if the interest-rate environment is conducive to new borrowing.
IFR’s SME Funding Roundtable in Frankfurt took the issue to the heart of the eurozone to gauge the situation in Europe’s biggest economy and to test the themes of bank deleveraging, the stricter regulatory climate and the likelihood of alternative capital sources (bonds, private placements, non-bank lending, etc) emerging to fill the funding gap.
Bottom-line: on the basis of comments made by IFR’s panellists, German SMEs aren’t suffering at all from a paucity of either bank or non-bank funding. In fact, they’re spoilt for choice. I’d asked, for instance, if banks were excited at the prospect of SME securitisation as a lay-off risk mitigant that would ride to the rescue of bank lending by freeing up balance sheet and offering regulatory capital relief. The answer from the banks was they didn’t need rescuing by ABS or anything else.
There is a clear move by Germany’s larger mid-caps to diversify from syndicated lending and Schuldscheine into alternative sources, but the driver isn’t the lack of availability of either; it’s much more about maximising the benefits of greater choice and driving home the advantages to be gained from doing so.
German large-cap companies are so over-banked that domestic banks have naturally moved to the next tier down to capture some wallet in a theoretically less busy segment of the market. But they’ve all done the same thing and have been followed by foreign banks, creating a fiercely competitive environment and by definition a seller’s market that is leading to longer tenors, edgier structures (such as cov-lite) and better pricing.
“The key issue is not that there’s not enough financing available for mid-cap companies, in some respects, there’s too much available. There is huge competition between banks and there are more and more banks entering Germany in the SME space, so I don’t think you need to be worried about the clients; you should be worried about the banks as they’re cutting margins and their lending standards are getting looser and looser,” one panellist said. Another spoke of an over-supply of cheap liquidity.
Despite uncertainties created by the situation in Ukraine, overall confidence remains passably high. The July jump in German factory orders on the back of non-domestic demand will have boosted sentiment, slightly flattened by the Q2 contraction in the overall economy.