Financing the corporate sector |
The stabilisation of the financial sector in the last year has led to a gradual improvement in the cost and the availability of credit for the corporate sector. The low base rates that have existed since the beginning of 2009 finally seem to be translated into lower borrowing rates for the corporate sector as well. The attractiveness of bank borrowing has significantly improved in the fourth quarter. Yet, for many corporates, bank borrowing remains difficult to get and CFOs expect difficult lending conditions beyond the recession as well. More stringent capital adequacy requirements for banks in the context of Basel 2 are not likely to help either. Corporates are more and more divided into two categories: those who have access to credit and those who don’t. Liquidity and cashflow, two of the big worries quoted by CFOs in 2009, will remain top of mind.
The overwhelming majority of CFOs think market intrest rates are at low levels. The pace of the recovery will depend partly on the extent to which banks transmit low market intrest rates to corporates and households.
The low base rates that have existed since the beginning of 2009 finally seem to be translated slowly into lower borrowing rates for corporate as well. The stabilisation of the financial sector in the last year has led to a gradual improvement in the cost and the availability of credit for the corporate sector. Liquidity premiums charged by banks have decreased. The net balance of CFOs rating bank borrowing as costly versus cheap has decreased from 60% in the first quarter to about 30% in the fourth quarter.
In terms of availability of credit, 2009 marked a gradual improvement: the net balance of CFOs who think that credit is unavailable has decreased from 73% in the first quarter to 13% in the fourth quarter. Yet, 40%of surveyed CFOs report credit is still difficult to obtain. NBB/BNB reports indicate a reduction in the number of short- and long-term loans granted in 2009. Likely reasons are the descent of credit demand of enterprises and the tightening of lending conditions. Non-resident banks have scaled back the number of credits to Belgian companies.
Notwithstanding the stabilisation of the financial sector and the overall improvement of the credit conditions, companies have been divided into two categories: those who have access to credit and those who don’t. More stringent capital adequacy requirements for banks might have a negative impact on credit availability in the future.
We observe an important change in the course of 2009 in the attractiveness of the various means of funding available to corporate. Bank borrowing, clearly out of favour and rated as unattractive in the beginning of the year, ends up as a slightly attractive way of funding at the end of the year. Notwithstanding this improvement, credit remains costly for the majority of corporates. For many corporates, particularly larger companies, equity and bond issuance has proven to be a more attractive way of financing their business.
CFOs remain wary of taking financial risk or raising gearing. CFOs reacted to the credit crunch and the recession by reducing financial risk on their balance sheets, through for instance, paying back debt and boosting cash reserves. After two quarters of rising balance sheets risk the third and fourth quarterly CFO survey show that financial risk has further declined. 80% of CFOs report now is not a good time to take greater risk onto the balance sheet.
Companies took lots of financial action during the crisis to survive, which affects the leverage on the balance sheets. Generally speaking, the over- and underleveraging decreased in 2009 (although, not by the same magnitude).
The attractiveness of the timing to issue equity and issue debt showed uninterrupted improvement in 2009. At the end of 2009, it became a good time to issue debt, while it was still not a good time to issue equity.
CFOs views on asset valuation have changed significantly in the last year. CFOs see both commercial real estate and government bonds as being overvalued. Meanwhile equity valuation has gone from being seen as the most undervalued asset in the beginning of 2009 to fair valued at the end. Yet, 61% of CFOs expect the BEL20 share index to be higher than today in 12 months time.
