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  • CFO Europe Magazine

Credit Check

New research diagnoses the health of Europe's corporate balance sheets.

When Telekom Austria looked into issuing a new bond late last year, it boasted an EDF of only 0.02%. Still, CFO Hans Tschuden found the interest rates on offer unacceptable. Despite the creditworthiness of the €5 billion company, it was “not the best time” to issue a traditional bond, Tschuden says.

His team went away to think of other ways to raise fresh funds. In August the company issued four-year promissory notes, instruments seldom used by Austrian companies but popular in neighbouring Germany. Provided that finance teams look around to find the markets that offer suitable spreads, “raising money is not a problem,” notes Tschuden. He initially wanted to raise €100m, but demand from banks and insurance firms for the notes pushed the final issue to €300m — €200m in a floating-rate tranche that initially pays 6.2% and €100m in a fixed-rate tranche paying 6.08%.

Towards the end of the summer, despite reporting a lower than expected profit for the second quarter of this year, the telco’s shares were buoyed after it confirmed previous guidance for profit and revenue growth, and a stable dividend, for the full year. Jittery markets appreciated the confidence in what Tschuden describes as “realistic and achievable” guidance.

Confidence Game

Logica, a UK-based IT services group, did even better, boosting its guidance for 2008 revenue growth, and reaffirming margin and leverage targets, as it unveiled half-year results last month. Notably, this happened even after the company took on much more debt after a string of acquisitions and devoted half the proceeds of the sale of its telecoms-products division last year to a share buyback, shortly before the credit crunch took hold.

“It’s always easy to look back and say you should have done the share buyback at a different time,” says Seamus Keating, Logica’s CFO. “You do it when you do because you believe it’s the right thing to do. We’re confident in the cash flows of the business.” So are the markets. Over the past three years, Logica’s EDF has fallen by more than 60%.

But in the current environment, confidence can be especially fragile. In July the story Wienerberger was telling the markets shifted abruptly, as the group reported an 8% drop in Ebitda for the first six months of 2008, due to steep declines in mature markets such as Germany and the UK. Now the company expects operating profit to fall by as much as 15% this year, a far cry from the 10% growth predicted only a few months earlier.

Despite the “overflow of information” available to companies, “there was no way that we could have foreseen what is happening today,” says Willy Van Riet, Wienerberger’s CFO. And in an effort to arm the company for sudden downturns such as these, the finance chief notes that nearly €1 billion raised through a rights issue and hybrid bond last year means that it “hasn’t felt the crunch.” Indeed, going into this year, net debt to Ebitda stood at 1x, down from 2.5x at the end of 2006. Van Riet is adamant that the policy for a dividend in line with last year’s amount remains in place.


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