Mauderer: Enterprises should further diversify their funding Guest contribution published in Handelsblatt
The COVID-19 pandemic is showing that enterprises need access to diversified sources of funding. Enterprises that have neglected to place their funding on a broader footing have problems more often in obtaining the necessary liquidity.
The pandemic has plunged the economy into a historic recession. It is not only in Germany that many enterprises are seeing their liquidity reserves dwindle. Sales are slumping, while running costs are not declining on the same scale.
National governments and legislatures have responded with comprehensive assistance programmes. It has been possible to prevent going concerns having temporary liquidity shortfalls, leading, within a short space of time, to solvency problems and waves of job losses.
In addition, central banks supported lending to enterprises and households by taking a large number of one-off measures. As a result of targeted longer-term refinancing operations (TLTROs), the banks received an additional injection of liquidity amounting to €564 billion net in June alone.
Given these enormous sums, we should not forget that these were purely emergency programmes. For that reason, enterprises should regard the pandemic as an opportunity to further diversify their funding and make it more resilient to crises. Innovation and growth need a healthy financing mix, especially when it comes to small and medium-sized enterprises.
A sound capital buffer is vital for getting through periods when the economy takes a turn for the worse. Thanks to the economic upswing of the past few years, this is where the majority of German enterprises can gain an edge.
There are exceptions, however. Some large enterprises with a strong capital market affinity have seen a downward rating migration over the past few years. More than half of the German enterprises active in the capital market entered the crisis with a credit rating of BBB or worse. In some places there is likely to be a dawning recognition that share buybacks when times are good might weaken their resilience in times of stress.
Furthermore, investors will be demanding more ambitious social and environmental standards in future, especially for equity investment. That is something that will have to be considered in financial planning.
In Germany, bank loans continue to play the most important part in debt financing. Only about 6% of debt finance is transacted through the capital market in Germany, compared with around 22% in the United States.
Although close relationship banking ties have often paid off, there are limits to their scope. Banks can grant resources only to the extent permitted by their capital positions, internal prudential guidelines, and regulatory standards.
Despite this, many enterprises hesitate to organise their financing on a broader base, and do so, even though expenses, say, for a rating or a listing can be more than justifiable if this means that the supply of liquidity is maintained in periods of stress.
For small and medium-sized enterprises, too, there are interesting alternatives to traditional bank loans. Loans against borrowers’ notes, for instance, are becoming more and more popular in Germany.
The outstanding volume of euro-denominated borrowers’ notes has more than doubled over the past five years and has now gone up to around €150 billion. That is also due to the fact that the disclosure and minimum volume requirements are lower than for traditional loans.
For larger enterprises, the issuance of commercial paper (CP) – that is, money market paper with maturities of typically less than one year – can also be an option. This is because this instrument is highly flexible, making it possible to raise liquidity quickly.
After making very little use of CP in the past, German enterprises have shown greater interest in it in the wake of the coronavirus crisis. This is revealed by the outstanding volume of CP issued by German enterprises, which went up from €16.6 billion in the first quarter of 2020 to €23.3 billion in the current quarter.
It is important to remember that the bank-financed system remains important. Despite that, the economy needs a variety of funding sources in order to withstand stress situations better and to remain innovative.
Young enterprises, in particular, which do not possess sufficient collateral for traditional loan-based financing, need unimpeded access to risk capital. Given the economic significance of a dynamic start-up scene, there is room for improvement in Germany in this respect.
Also with that in mind, it is essential that the capital markets in Europe become even more closely integrated. A genuine capital markets union can be a matchmaker by bringing together investors and attractive investment opportunities, distributing risks internationally, and making corporate finance more resilient to crises.
Even though the policymaking focus at the moment is on the urgent matter of overcoming the COVID-19 pandemic, the capital markets union will have a key role to play in the medium term, by opening up new sources of finance and thus becoming an engine of investment and economic growth.