by Taron Wade, Associate Director, Corporate Ratings, and Alexandra Dimitrijevic, Managing Director, Standard & Poor’s Ratings Services
The funding landscape for European mid-market businesses is changing rapidly. As banks deleverage across Europe, the treasury and finance departments of mid-market companies – defined as companies with revenues between €100m and €1.5bn and outstanding debt between €50m and €500m – must look outside traditional banking relationships to secure funding for growth. And as yields in credit markets have recently been at record lows, investors’ appetite for this emerging asset class has never been greater. Yet despite a small amount of progress, a cohesive pan-European funding market remains elusive.
A fully-fledged European funding market for mid-market companies will require significant cultural and operational changes on the part of potential issuers and investors. Mid-market firms often find the interest rates demanded by institutional investors to be too expensive, yet lower rates will require a level of financial disclosure higher than that to which they are accustomed. This is particularly important for smaller investors without the means to build internal research and risk management capabilities. At the same time, differing regulatory and accounting environments across Europe also make establishing a cohesive funding market an uphill struggle.
A crucial sector for regional economies
New capital adequacy regimes – coupled with more general bank deleveraging throughout Europe – mean that European banks are limiting their lending to major clients, usually domestic companies with which they have strong relationships. The same deleveraging process also has the effect of restricting capital- and cost-intensive wholesale and international businesses. According to our research, this strategy is partly a result of pressure from national governments to prioritise domestic lending and increase purchases of domestic government debt to replace thinning foreign investment.
For these reasons, it is vital that Europe’s mid-market businesses secure alternative funding sources – for their own benefit, and that of the region’s economies. A critical engine for economic growth and employment in Europe, mid-market firms generate around one-third of private sector revenue and employ a third of the workforce across France, Germany, Italy, and the UK, according to research from GE Capital.