More equity and fewer loans – corporations changing their funding structure
Over the past few years, non-financial corporations have, in terms of their total assets, built up their equity capital and taken out fewer new bank loans. This is the finding of an article contained in the Bundesbank’s current Monthly Report. Non-financial corporations are enterprises other than banks, insurance undertakings and other financial intermediaries. The Bundesbank regards this as a positive development as it believes this will increase corporations’ resilience to crisis.
To analyse these funding structures, the Bundesbank’s experts used the Bundesbank’s corporate financial statement statistics. The study encompassed a broad database of enterprises from key economic sectors, such as manufacturing, construction, trade, and services. It was found that the equity capital base has been increasingly strengthened since as long ago as the late 1990s. The analysis states that, from the late 1990s to the end of 2015, the equity ratio rose from an average of 20% to 30% of total assets. Small enterprises, in particular, were found to have increased their capital base. Between 2010 and 2015 alone, based on the median, small enterprises saw their equity capital grow by over 6.5 percentage points to 28.3%. There was a somewhat smaller increase in the equity ratio in the case of medium-sized and large enterprises. “
The observable gap between the equity ratios of small enterprises and large enterprises has now largely disappeared”, write the Bundesbank’s experts in the latest Monthly Report. As they see it, the higher equity levels mean that enterprises have improved their financial resilience and internal capital adequacy.
Intra-group liabilities gaining in importance
Intra-group liabilities, in particular, saw a further increase in funding. Most common among large firms, such liabilities refer to debts vis-à-vis affiliated enterprises and partners. After equity capital, they are now the second most important source of funding for non-financial corporations in Germany. Between 2010 and 2015 alone, intra-group liabilities rose from 16.8% to 19.8% of total assets. The Bundesbank's economists believe the causes to be the growing significance of the available intra-group funding sources, increasing globalisation and the expanded use of value-added processes based on the division of labour.
Bank debt declining
In addition to the increase in equity ratios and intra-group liabilities, the Bundesbank's experts also note a decline in bank debt in the period under review, with the median debt ratio with respect to banks falling from 9.1% in 2010 to 7.6% in 2015. Short-term bank debt declined from 1.9% to 1.6% of total assets over the same period, although the study's findings revealed that bank loans are still a major source of funding for many enterprises. According to the Monthly Report, small and medium-sized enterprises, in particular, still rely quite heavily on bank loans for their funding. Chiefly among small and medium-sized enterprises and enterprises not affiliated with a group, a higher level of liquidity provisioning can also be observed along with an increased holding of cash, allowing greater security and decision-making flexibility in liquidity management.
Greater resilience to crisis overall
The Bundesbank takes a positive view of both the altered funding patterns and the increased holding of liquidity. “
The adjustments in the funding structures as well as in liquidity-holding bring considerable advantages for enterprises' viability and are likely to have helped to make the German corporate sector more resilient to crisis,” the experts report.