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Corporate funding in the UK during and after the Financial Crisis
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Corporate funding in the UK during and after the Financial Crisis


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Corporate funding in the UK during and after the Financial Crisis …

Corporate funding in the UK during and after the Financial Crisis
by Adrian Marsh,
Director of Tax, Treasury & Corporate Finance
Tesco plc

Published in: Economy & Finance, Business

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  • 1. Corporate funding in the UK during and after the Financial Crisis
    5 July 2011
    Adrian Marsh,
    Director of Tax, Treasury & Corporate Finance
    Tesco plc
    Confidential Presentation
  • 2. Context: 2007-2009 Financial Crisis
    • Sub-prime contagion
    Apr- Aug 07:
    • 17 Ma
    • 3. Bear Stearns collapse
    Mar 08:
    • Nov 08:
    • 4. Volatility reaches record levels, markets hit bottom
    Nov 08 – Mar 09:
    • Nov
    • 5. BoE, Fed announce quantitative easing
    Mar 09:
    • Fannie Mae & Freddie Mac bailed out, AIG $85bn rescue package
    • 6. Lehman Brothers bankruptcy. BofA takeover of Merrill Lynch
    • 7. Bank casualties reach Europe: HBOS, Fortis, Bradford & Bingley, Iceland, HvB. RBS and Lloyds bail-out
    Sep – Nov 08:
    Timeline (January 2007 – December 2009)
    • Northern Rock gets emergency funding from BoE (see slides 18-19)
    Sep 07:
    During the financial crisis, bank capital and liquidity came under increased scrutiny as banks faced difficulties in accessing traditional sources of funding
    Failures such as Lehman Brothers, Lloyds and RBS threw into focus banks ability to absorb losses and the quality and quantity of capital held for this purpose
    The impact on banks had a profound knock-on impact on the way corporates were able to fund themselves
    Source: Factset, Bloomberg
  • 8. Periods of sub-investment grade market closure
    5 months
    17 months
    Financial Crisis Impact on Corporate Funding
    As well as pricing implications, lower-rated companies, particularly non-investment grade, were exposed to liquidity risk in not being able to issue in times of financial distress
    Monthly GBP and EUR industrial issuance volumes and CDS index
    Source: Dealogic and Barclays. 17 month period of closure excludes small £75m issue in June 2008
  • 9. Pre-crisis, many corporates over-exposed to bank market
    Driven by historic high liquidity and low pricing
    As liquidity dried-up, unable to refinance and forced into debt or equity capital markets
    Banks withdrew from the markets; bank groups shrank
    Refinanced bank deals typically smaller; 3 year tenor max
    Flight to quality
    Pricing differential between higher and lower rated credits widened
    Emergence of Forward Start Facilities as mechanism to access loan capital
    Weaker borrowers aiming to leverage the residual value of cheap facilities in exchange for renewed commitments
    What Happened to Corporate Funding?
  • 10. Profile of UK Capital Raising over a Cycle
    During the crisis, many corporates were forced to examine their ongoing long-term capital structure and consider diversifying sources of debt away from the bank market
    UK Corporates Capital Raising
    Further funding diversification to come in EMEA? - move toward US DCM focussed financing model?
    • Historically UK corporates very reliant on loan market
    • 11. During the crisis, availability of bank funding contracted significantly, however more than compensated by record breaking bond market issuance, particularly in 2009
    • 12. Many UK corporates also forced to access the equity markets (e.g. Wolseley, CRH, Premier Foods, William Hill etc.)
    • 13. Total debt capital raising has maintained relatively constant over the past 5 years (ex. 2007 spike driven by high volumes of bank funded M&A and PE sponsor deals)
    • 14. Diversification into other funding less evident again from 2010 onwards - evidence of bank market recovery
    Source: Dealogic as at June 2011
    Note: Data includes all capital raising by UK corporates i.e. IG & HY, excl. FIG
  • 15. Evolution of the Loan Market over a Cycle
    Corporates who continued to rely on the bank market were forced to accept lower liquidity and higher pricing
    Pricing and volume dynamics over a cycle
    Average Cycle BBB pricing = 98bps
    Average Cycle A pricing = 72bps
    Average Volume = $180bn
    Average Volume = $100bn
    Average Volume = $163bn
    Average Pricing = 29 / 40 bps
    Average Pricing = 116 / 153 bps
    Average Pricing = 70 / 101 bps
    2010 - Today
    Peak Crisis
    Characterised by benign regulatory environment, robust bank capital levels and resultant high market liquidity
    Drove highly favourable market conditions for borrowers, and high volumes as corporates took advantage of:
    Availability of tenor: 5-7 years
    Pricing lows: fully drawn margin in mid-20bps range
    • Bank capital raisings have repaired balance sheets
    • 16. Capital supply/demand imbalance develops: available capacity but supply remains low as pricing remains elevated
    • 17. Leads to competitive market behaviour to win business, and drives downward pressure on pricing
    • 18. Volumes begin to recover as (i) discretionary refinancing can no longer be postponed and (ii) pricing appears to be stabilising
    • 19. Loan pricing begins to increase to mirror increase in bank funding costs
    • 20. Volumes fall sharply in response to higher pricing
    • 21. Borrowers ceased discretionary refinancings
    • 22. Acquisition and drawn funding met by debt capital markets
    • 23. Further consolidation in highly fragmented European bank market
    • 24. Volumes remain subdued on both supply and demand side
    • 25. Bank capital raising and low volumes (asset run off) repair balance sheets
  • 26. Impact on Loan Market Tenors
    The profile of loan market tenors changed significantly during the crisis, although today appears to have returned to pre-crisis norms
    EMEA investment Grade Loan Tenors
    Loan Market Tenors
    Historically, a range of tenors up 7 year tenors were available for strong investment grade borrowers
    5 years more normal, although corporates used a range of tenors, particularly to fund acquisitions
    Given capital sensitive environment , longer maturities were unavailable for even the strongest borrowers during the financial crisis
    Return of tenor despite inflationary capital impact of Basel III
    Testament to relative health of European bank balance sheets
    More limited post credit crisis examples of >3 year tenor for crossover and sub-investment grade borrowers owing to capital consumptive nature of sub-IG exposure under the Basel II regulatory capital regime
    Today’s loan market conditions are generally supportive of corporate refinancings
    Source: Dealogic and Barclays
  • 27. Where Next for the Loan Market?
    Current competitive pricing supported by strong technical factors, whilst structural changes in bank market and wider macroeconomic events of increasing concern
    Strong technical factors
    Buoyant market sentiment
    • Asset run off as borrowers refinance with smaller facilities
    • 28. Limited M&A financing to date
    • 29. Bank lending budgets up 20% on average for 2011
    • 30. Success of loan transactions in past 12 months
    • 31. Relationship lending proving to be resilient with careful management of banks and capital ask
    POSITIVE dynamics
    Loan market pricing, liquidity and execution risk
    Increasing cost of liquidity
    Cost and availability of bank funding
    Return of risk aversion? – uncertain macro outlook
    New rules on liquidity buffers via LCR and NSFR
    Additional requirements to maintain ‘liquid’ assets costly to banks
    Higher cost for undrawn lines?
    LMA lobbying ongoing
    • Renewed volatility and deterioration of some credit indicators
    • 32. Dampening of sentiment, as evidenced by Central Bank lending surveys?
    • 33. Cost of bailouts and contagion?
    • 34. Additional exogenous shocks in macro and geo-political environment
    • 35. Threat of double dip?
    • 36. More expensive capital model for banks
    • 37. New regulation directives yet to be ratified at local level
    • 38. Impact of super-equivalence?
    • 39. Impact of future bank stress tests?
    • 40. Further capital raising by European banks to come?
    • 41. Withdrawal of Government support schemes
    • 42. Eurozone “debt crisis”
    • 43. Costly liability extensions, as imposed by regulators
    • 44. Elevated bank funding costs for >2 years – a long-term ‘shift’?
    • 45. Securitised markets yet to recover
    Bank sector specific CHALLENGES
  • 46. Sources of Liquidity haven’t changed
    Cash/working capital
    Bank Debt
    Public Debt
    Private debt
    Asset Finance
  • 47. Lessons Learned?
    Many corporates got ‘burned’ during the crisis
    Liquidity management is key
    Corporates are refinancing earlier to avoid running up against maturities
    2 -3 years prior to maturity not uncommon
    Corporates have increasingly diversified funding sources
    Debt Capital Markets a more important part of the funding mix
    De-levered balance sheets and increasing cash piles are more common as corporates seek to more actively manage their liquidity position
  • 48. What do ‘Best in Class’ Treasurers / CFOs do?
    No quick fixes
    Understand business “rhythm”
    Align capital structure with business strategies and growth opportunities
    Consider the full spectrum of the capital structure when considering financing decisions
    Make financing decisions from both a strategic and tactical perspective
    Recognise that liquidity is king
    Maintain optionality
    Communicate regularly with past, current and potential capital providers & rating agencies
    Engage (and debate) with banks on structuring, not only execution
  • 49. Disclaimer
    Managing Through Crisis
    • Cashflow forecast – lift up every “drain cover”
    • 50. Engage on multiple fronts – don’t listen to just one advisor
    • 51. Learn from past – don’t assume crisis lasts forever
    • 52. Embed within business concepts of cash & liquidity – the company does not have a blank cheque book
    • 53. Secure liquidity even if it is not yet required – the early bird catches the worm
    • 54. Ensure the Board is up to speed and able to respond quickly – markets open and shut extremely quickly