Published: August 04, 2010
A weaker than expected economic recovery and historically favourable conditions in corporate bond markets are moderating demand for bank credit among Fortune 500 companies. With major banks starting to compete aggressively to make loans to these creditworthy borrowers, the largest US companies find themselves in an enviable position in terms of funding.
Every year, Greenwich Associates asks the Fortune 500 companies participating in the firm’s US Large Corporate Banking Research Study to name the banks they use for credit and other banking services, and to rate these providers according to a series of detailed criteria. In 2009, on average only 23% of the customers of the top 10 corporate banks in the United States gave these banks an “excellent” rating in terms of “willingness to extend credit in amounts and at terms that meet expectations.” In 2010 that share proportion jumped to 43%, with another 37% ranking their banks as “above average” in this category. (See figure 1) Client ratings improved along similar lines in the categories of banks’ “commitment to long-term, sustainable relationships,” and to companies’ overall levels of satisfaction with their current providers. (See figure 2)
“In the Fortune 500, 77% of companies that use one of the top 10 corporate banks in the United States rate their overall level of satisfaction with that bank as ‘excellent’ or ‘above average’,” says Greenwich Associates consultant Don Raftery. “That is a far cry from the state of play in the middle market or with small businesses, where companies’ inability to secure essential financing from their banks has fractured many long-standing relationships.”
Companies have been able to pay down credit lines tapped during the worst months of the global crisis.
US Fortune 500 companies also report significant improvement in their ability to access various types of bank credit products over the past few months. Twenty-eight per cent of these companies say their access to bank revolving credit facilities has either “increased” or “increased significantly” over the past three months. Only 4% say their access has diminished. Both are in stark contrast to the same time last year when 40% cited decreased access and only 8% an increase. The story is much the same for bank term loans, which a quarter of Fortune 500 companies say have become easier to secure over the past three months, with only 4% saying their access has decreased. Twenty per cent of the companies say their access to bank structured finance has improved, versus only 2% reporting deterioration in conditions. (See figure 3)
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The bad news for banks — and possibly for the economy as a whole: Only 7% of Fortune 500 companies say their need for capital to fund capital expenditures increased over the past few months, with 83% reporting that their need for CAPEX financing was unchanged and a surprising one-in-10 saying that their need for this type of funding diminished. The research shows little in the way of new funding needs for mergers & acquisition financing, structured finance or operational funding.
Fewer companies say they are basing decisions about which banks to use on the percieved strength or weakness of bank balance sheets.
The disappointing lack of demand for CAPEX financing and other forms of growth-oriented funding reflects an economic recovery that has proved much weaker than expected. However, companies’ low level of demand for bank credit is also tied closely to the boom in corporate bond issuance since the start of 2010. In 2009, 46% of Fortune 500 companies said they were able to access corporate bond markets without any difficulty due to market conditions or other external factors. In 2010, that share jumped to approximately three-quarters. Overall, 93% of Fortune 500 companies report favourable levels of access to corporate bond markets. (See figure 4)
“Fifty-three per cent of companies issued bonds in 2010, up from 51%,” says Greenwich Associates consultant John Colon. “Companies were so active in locking in funds at attractive rates that they seem to have satisfied much of their long-term financing needs. Looking ahead to 2011, a lower 40% of the total companies interviewed plan to issue new bonds, even at historically low interest rates.” (See figure 5)
As a result of these factors, companies have been able to pay down credit lines tapped during the worst months of the global crisis. In 2009, Fortune 500 companies had drawn down an average 21% of available bank credit lines. In 2010, that share fell to 13%. The drop was even more dramatic among the mid-tier of the Fortune 500 — companies with annual sales between $2.5bn and $5bn. In 2009, companies in this group had drawn down 43% of available credit lines. In 2010 that share has declined to 11%. Even Fortune 500 companies with non-investment-grade credit ratings paid down substantial amounts of their credit liens over the 12-month period. Although companies in this group currently have 27% of their available bank credit lines drawn down, that share is down from 37% in 2009. (See figure 6)
Companies Keep Their Eyes on Credit
Nevertheless, credit remains the core element of corporate banking relationships and in the wake of a historic credit crunch, Fortune 500 companies remain on the lookout for opportunities to protect and expand their access to credit. Among Fortune 500 companies that expect to increase their business with individual banks, approximately 55% cite the bank’s willingness to extend credit in sufficient amounts as a key reason why. On the flip side, when companies expect to reduce a bank’s share of their business, the bank’s unwillingness to provide credit is cited in nearly 30% of instances. “That said, the fact that 63% of Fortune 500 companies say they are not at all restricted by credit needs in their selections of advisors and underwriters demonstrates that these companies have ample access to credit,” says Greenwich Associates consultant David Fox. “Last year, only 48% of these companies said they felt free to choose advisors and underwriters without consideration of credit needs.”
Of course, credit relationships are still a key driver of business in the debt capital markets. Two-thirds of companies participating cite “significant participation in the company’s credit facilities” as one of the primary factors they consider when awarding the mandate on a long-term bond offering — making credit relationships the most important criteria in this process. Reflecting the improving credit conditions, however, companies have reduced the minimum share of their overall credit that a bank must provide in order to be considered for a lead manager role. In 2009 companies required a minimum commitment of 12%; in 2010 that share dropped to 9%. (See figure 7)
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In a sure sign that banking and credit markets for Fortune 500 companies have returned to a more normal footing, fewer companies say they are basing decisions about which banks to use on the perceived strength or weakness of bank balance sheets. In 2009, when Fortune 500 companies said they planned to increase business with one or more banks, 40% cited the banks’ financial stability or reliability as a counterparty as a key reason why. When companies planned to reduce business with a bank, approximately a quarter of the companies attributed it to balance sheet weakness or unreliability. This year, only 15% of companies say that balance sheet issues or concerns about counterparty reliability are a key reason for reducing business with a bank and only 35% cite balance sheet strength as reason why they plan to increase business with a bank. (See figure 8)
Greenwich Associates consultants Don Raftery, John Colon and David Fox advise on banking in North America and Europe.
The study results suggest that US banks could be on the verge of a market-share war within the Fortune 500 client segment. Feedback from large US companies makes clear that banks are now on a much more stable footing and are more able to compete for lending business in the Fortune 500. The fact that the banks are generating fewer revenues in this business due to tepid demand from these large borrowers is prompting some banks to get more aggressive in rates and terms. “It is a unique moment in US corporate credit markets,” says Greenwich Associates consultant Don Raftery. “At a time when many smaller businesses are still starved for credit, there appears to be a credit glut in the Fortune 500.”
At a time when many smaller businesses are still starved for credit, there appears to be a credit glut in the Fortune 500.
The wide availability of credit to Fortune 500 companies is bad news for banks that made headway among this client segment as some of the largest U.S. banks struggled during the during the global crisis. That group is led by several foreign banks which gained substantial numbers of new “core banking” relationships with Fortune 500 companies in the United States from 2008 to 2010. “Many of these new relationships arose in part because these banks were able and willing to lend in a period of difficult credit conditions,” says Greenwich Associates consultant John Colon. “The sustainability of these gains will be tested in a much different and core competitive credit environment.”
Despite gains by competitors, a handful of large banks continue to dominate the US corporate banking business. Eighty-seven percent of Fortune 500 companies do business with Bank of America Merrill Lynch, 80% use J.P. Morgan and more than 60% both use Citi and Wells Fargo.
In this market, the biggest are also the best. Bank of America Merrill Lynch and J.P. Morgan are the 2010 Greenwich Quality Leaders in US Corporate Banking. Greenwich Quality Leaders are firms that have distinguished themselves by receiving quality ratings from corporate clients that exceed those awarded to competitors by a statistically significant margin.
J.P. Morgan and Bank of America Merrill Lynch are also the 2010 Greenwich Share Leaders in US Debt Capital Markets. Seventy-eight percent of Fortune 500 US companies name J.P. Morgan as an important debt capital market relationship and approximately 70% cite Bank of America Merrill Lynch. “Although companies often allocate their debt capital markets business to their primary lenders, in the U.S. companies that do so do not sacrifice in terms of quality or capabilities,” says John Colon. “The 2010 Greenwich Quality Leader in US Debt Capital Markets is J.P. Morgan.”
The following tables list the 2010 Greenwich Share and Quality Leaders in US Corporate Banking and Debt Capital Markets.[[[PAGE]]]
Greenwich Associates consultants Don Raftery, John Colon and David Fox advise on banking in North America and Europe.
Greenwich Associates provides research-based
strategy management services for financial professionals.
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www.greenwich.com.
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