• Strategy
  • CFO Europe Magazine

As Good as It Gets

New research for CFO Europe shows corporate balance sheets are in great shape, for now.

View the ranking of Europe’s largest 100 debt issuers.

If you had to choose one company that embodied the ups and downs of the business cycle over the past 10 years, KPN might be it. From euphoria in the late 1990s to the plunge in share prices in 2000 and 2001, frenzied cost-cutting in subsequent years and, recently, a return to growth and dealmaking, the €12 billion Dutch telecoms company has seen it all.

Last month, KPN proudly unveiled impressive first quarter results, including a 40 percent rise in profits, thanks in large part to the takeover of rival Telfort in late 2005. Over the past three years, the steady improvement in its balance sheet has meant that KPN has cut its probability of default by 98 percent, making it one of the top performers over this period, according to a new study of the 100 largest European debt issuers prepared for CFO Europe by Moody’s KMV (MKMV), a credit research company. Indeed, the study, which is commissioned every two years, shows that balance sheets have rarely been in better shape. The median issuer has cut its probability of default by more than 80 percent. Only two issuers in our sample, financial holding companies Finatis of France and IFI of Italy, experienced an increase in default risk over the period. (See “Reality Check,” June 2004, for the previous study.)

This trend, however, may now be set to go into reverse. At KPN, for example, CFO Marcel Smits is reassessing the company’s capital structure. With debt down from €23 billion in 2001 to around €8 billion today, and with nearly €3 billion of cash on hand, “invariably, people ask whether there are circumstances under which we would be comfortable relaxing our financial framework,” Smits says. “The answer is ‘yes.’” That’s why, he explains, it was becoming increasingly urgent for KPN to map out its new balance sheet vision for the financial community.

So, in February, KPN announced that it will pursue a more aggressive financial profile, targeting net debt to Ebitda of between 2.0 and 2.5 times, compared with 1.9 at the end of 2005. Payouts will include dividends this year and next of at least €950m (the amount paid for 2005), and €1 billion of share buybacks this year in addition to the €2.8 billion of shares that it has repurchased since 2004. The announcement triggered immediate credit rating downgrades (to BBB+ by S&P, Baa2 by Moody’s), leaving the company a few notches above “junk” status. But according to the finance chief, the downgrades were fully anticipated and will result in “no significant penalty” as far as financing costs are concerned.

Like KPN, companies across the region have shored up their balance sheets via cost-cutting programs, asset sales, and conservative investment policies. Now, with economic growth picking up and borrowing costs low for the time being, companies are poised to “make a break from the parsimony” of recent years and begin investing in M&A and other growth plans, noted a S&P report issued last month.


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