Show me the money, corporate treasurers seem to be saying. Refinancing was the issue that dominated the treasury agenda above all others during the past year at more than 100 companies worldwide, according to a new survey by Ernst & Young. Just under 40% of the treasurers surveyed mentioned refinancing as an issue, with more than half of them (27% of the total) citing it as the top concern.
Given the state of banks’ balance sheets and their attempts to scale down and derisk their exposures, availability of funding is certain to be an ongoing problem for companies. As ever, treasurers say funding is easy to get if the corporate balance sheet is in good shape — or in other words, banks will gladly lend money to businesses that don’t need it.
Given that, companies are looking to diversify funding sources, E&Y says, both by increasing the number of counterparties they deal with and tapping into European and U.S. capital markets more during the next couple of years.
A measure of the scale of the refinancing problem is revealed in a recent report by Standard & Poor’s Ratings Services. S&P suggests there is as much as a $46 trillion “credit overhang” — the amount of money corporates will need to raise between 2012 and 2016 to refinance their soon-to-mature debts and to fund capital expenditure and working capital growth.
The combination of bank balance-sheet restructuring, a euro zone crisis, a softening U.S. recovery, and the prospect of slower growth in China could make for what S&P calls “a perfect storm” in credit markets. S&P’s working assumption is that “global banks and debt capital markets will largely be able to continue to provide the majority of liquidity to allow most corporate issuers to proactively manage their forthcoming refinancings.” However, S&P warns, “the balance is fragile” and there is the threat of financing disruptions “even for borrowers that are not highly leveraged.”
New money requirements from 2012 to 2016 could be as much as $2.3 trillion in the euro area and the United Kingdom, $3 trillion in the United States, almost $10 trillion in China, and $1 trillion in Japan. (Those numbers assume corporate debt grows at 1.2 times the rate of GDP over the next five years.)
Added to this are estimated refinancing needs of $8.6 trillion in the euro area and the United Kingdom, $8.6 trillion in the United States, $7 trillion in China, and $5.8 trillion in Japan.
While many companies have huge piles of spare cash — some €745 billion ($931 billion) in Europe, the Middle East, and Africa as of 2010, S&P estimates — they are not expected to use those cash reserves to repay debt.
Of late, some European companies have been turning to U.S. markets for financing, according to statistics published by Leveraged Commentary & Data, a division of S&P Capital IQ. The first four months of 2012 saw European borrowers tap the U.S. leveraged loan market to the tune of €7.3 billion ($9.1 billion), with another €11.4 billion ($14.3 billion) raised in the high-yield market. The combined total is more than double the amount raised by European companies in the United States in the same period of 2011. In fact, it’s more than the €15.7 billion ($19.6 billion) raised by Europeans in these markets for all of 2011.
Andrew Sawers is editor of CFO European Briefing, a CFO online publication.