You Can Run But You Can’t Hide

Finance chiefs around the world agree that credit is hard to come by and there is little relief in sight.

And yet Pace may be luckier than other companies. A December survey of UK firms found that banks had withdrawn unused credit lines from a third of respondents’ companies, and more than half said they did not expect to be able to renew current credit lines in full over the following 12 months.

Klaus Kremers, restructuring and turnaround partner at Roland Berger Strategy Consultants, which conducted the survey, confirmed that “credit is being progressively eroded as the crisis continues.” He predicts some “serious casualties” among UK businesses throughout 2009.

Across the Channel, Jean-Claude Suquet, CFO of Paris-based Carbone Lorraine, a €731m advanced-materials and electrical-equipment firm, agrees the situation is deteriorating. He successfully renegotiated a syndicated loan last summer, months ahead of schedule, in response to what he saw as “the bank situation worsening quarter after quarter.”

Intent on pursuing a growth strategy for its carbon products, which are a key component of solar-energy systems, the company struggled to find a solution. “Issuing new shares would be too dilutive,” Suquet says, “because our price has gone down by 40% since September.”

Instead, the company opted for an approach it had discussed years before with its key bank, Société Générale, but never implemented. Described as a “step-up equity facility,” it is a two-year line of credit that Carbone Lorraine may or may not use. If it does choose to exercise it, the company will issue new shares to the bank based on the prevailing price at the time. This means the bank shares some upside if the company’s share price rises, but also absorbs some risk, as evidenced by the fact that the terms allow for a 10% discount on the newly issued shares. Worth up to €75m, or a maximum of 17.5% of the company’s share capital, the facility is adequate for Carbone Lorraine today, and Suquet adds that, “if within six months or a year the market is less volatile and the risk is less for Société Générale, I can call and discuss a new, lower discount. It’s very flexible.”

Like Pace’s Hall, Suquet was in a fortunate position, as banking relationships forged when business was better meant the company had alternatives to turn to when the going got tough. But while forward-­looking CFOs are proving they can tap new funds even in today’s dire circumstances, the broader outlook for Europe’s companies is less cheery. After the “near-closure of the capital markets and a collapse in confidence” following Lehman Brothers’s bankruptcy last year, Moody’s, a ratings agency, claims the scarcity and high cost of funding will continue to be the biggest challenge faced by companies in most industries this year.

Across the pond
In the global pursuit of credit, few CFOs are as fortunate as Holly Koeppel. As finance chief of American Electric Power, one of the US’s largest electricity generators (and consumers of credit), Koeppel has access to several lines of credit totalling $4 billion, provided by a consortium of 28 domestic and foreign banks. When the commercial-paper market dried up last autumn, hampering AEP’s ability to raise short-term cash, Koeppel drew $2 billion from the facility, banked the cash and retired the commercial paper. “That was our bridge to get us through the end of the year so we could stay out of the long-term credit market when it was roiling,” she says. When the seas calmed for a bit in January, AEP waded back into the credit markets with a bond offering at 7%, a remarkably reasonable rate.


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