Astructural shift is taking place in the UK corporate funding market. A report by S&P – published to coincide with the ACT breakfast it sponsored earlier this autumn – underlines the significance of the changes.
Traditionally all sizes of UK corporate have looked to the banks as their first source of finance. Indeed for many companies, including sizable entities, the banks have been their only real source of debt funding. But as the aftermath of the credit crunch and the financial crisis continue to be worked out by the financial sector, governments and regulators, it is increasingly clear that this lack of bank lending is not some blip which will fade. Rather, the reforms on risk management, regulatory capital and liquidity are making it likely that in the future the provision of corporate credit will be more restricted than in the past.
Some would argue that this is welcome. The easy availability of finance creates heady atmospheres where even the most sensible companies can be seduced away from their carefully worked out strategy by the lure of quick wins and spectacular acquisitions.
But if lending is to take a historical downturn, treasurers and finance directors will be expected to have a plan B worked out. While in the short term free cashflow may answer the funding need, S&P claims that in the longer term it will be the bond markets which will step up to the plate.
Relationship banking will remain a major force for corporates in terms of services as well as credit, but in the long term the bond market may take over from the syndicated loan market. This may make perfect sense for the largest companies but a permanent diminution of credit for everyone else raises some tough questions which remain unanswered. S&P wrote in its report: “Owing to economies of scale, it is generally uneconomic to issue public bonds below approximately £100m, although smaller issues are possible in private placement markets where companies are either existing public issues or well-known private companies.”
Treasurers of all sizes of entity need to climb up a learning curve pretty smartly to decide what are the best funding options available. And they need to keep in touch with the latest trends and sentiment. Bank lending, or the lack of it, will stay in newspaper headlines as politicians and business leaders bemoan the unwillingness and/or inability of the banks to lend. Banks say they have money to lend but a lack of demand from sensible would-be borrowers, while corporates complain that banks need to allow lending decisions to be made by those who know their business.
Richard Lambert, a keynote speaker at this year’s ACT Annual Conference, in a speech to mark his departure as director-general of the CBI, tried to set out a roadmap of how companies and banks could rebuild trust. He pointed out that a healthy economy needs a healthy banking system. This will take time and the process has barely started. If we are to make significant progress we will have to realise that the future of finance will not look much like the past.
PETER WILLIAMS
EDITOR
