Corporate funding in the UK during and after the Financial Crisis<br />5 July 2011<br />Adrian Marsh,<br />Director of Tax...
Context: 2007-2009 Financial Crisis <br /><ul><li>Sub-prime contagion</li></ul>Apr- Aug 07:<br /><ul><li>17 Ma
Bear Stearns collapse</li></ul>Mar 08:<br /><ul><li>Nov 08:
Volatility reaches record levels, markets hit bottom</li></ul>Nov 08 – Mar 09:<br /><ul><li>Nov
BoE, Fed announce quantitative easing </li></ul>Mar 09:<br /><ul><li>Fannie Mae & Freddie Mac bailed out, AIG $85bn rescue...
Lehman Brothers bankruptcy. BofA takeover of Merrill Lynch
Bank casualties reach Europe: HBOS, Fortis, Bradford & Bingley, Iceland, HvB. RBS and Lloyds bail-out</li></ul>Sep – Nov 0...
Periods of sub-investment grade market closure<br />5 months<br />17 months<br />Financial Crisis Impact on Corporate Fund...
Pre-crisis, many corporates over-exposed to bank market<br />Driven by historic high liquidity and low pricing<br />As liq...
Profile of UK Capital Raising over a Cycle<br />During the crisis, many corporates were forced to examine their ongoing lo...
During the crisis, availability of bank funding contracted significantly, however more than compensated by record breaking...
Many UK corporates also forced to access the equity markets (e.g. Wolseley, CRH, Premier Foods, William Hill etc.)
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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
by Adrian Marsh,
Director of Tax, Treasury & Corporate Finance
Tesco plc

www.cfoevent.com

Published in: Economy & Finance, Business
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Corporate funding in the UK during and after the Financial Crisis

  1. 1. Corporate funding in the UK during and after the Financial Crisis<br />5 July 2011<br />Adrian Marsh,<br />Director of Tax, Treasury & Corporate Finance<br />Tesco plc<br />Confidential Presentation<br />
  2. 2. Context: 2007-2009 Financial Crisis <br /><ul><li>Sub-prime contagion</li></ul>Apr- Aug 07:<br /><ul><li>17 Ma
  3. 3. Bear Stearns collapse</li></ul>Mar 08:<br /><ul><li>Nov 08:
  4. 4. Volatility reaches record levels, markets hit bottom</li></ul>Nov 08 – Mar 09:<br /><ul><li>Nov
  5. 5. BoE, Fed announce quantitative easing </li></ul>Mar 09:<br /><ul><li>Fannie Mae & Freddie Mac bailed out, AIG $85bn rescue package
  6. 6. Lehman Brothers bankruptcy. BofA takeover of Merrill Lynch
  7. 7. Bank casualties reach Europe: HBOS, Fortis, Bradford & Bingley, Iceland, HvB. RBS and Lloyds bail-out</li></ul>Sep – Nov 08:<br />Timeline (January 2007 – December 2009)<br /><ul><li>Northern Rock gets emergency funding from BoE (see slides 18-19)</li></ul>Sep 07:<br />During the financial crisis, bank capital and liquidity came under increased scrutiny as banks faced difficulties in accessing traditional sources of funding<br />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<br />The impact on banks had a profound knock-on impact on the way corporates were able to fund themselves<br />1<br />___________________________<br />Source: Factset, Bloomberg<br />
  8. 8. Periods of sub-investment grade market closure<br />5 months<br />17 months<br />Financial Crisis Impact on Corporate Funding<br />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<br />Monthly GBP and EUR industrial issuance volumes and CDS index<br />___________________________<br />Source: Dealogic and Barclays. 17 month period of closure excludes small £75m issue in June 2008<br />2<br />
  9. 9. Pre-crisis, many corporates over-exposed to bank market<br />Driven by historic high liquidity and low pricing<br />As liquidity dried-up, unable to refinance and forced into debt or equity capital markets<br />Banks withdrew from the markets; bank groups shrank<br />Refinanced bank deals typically smaller; 3 year tenor max<br />Flight to quality<br />Pricing differential between higher and lower rated credits widened<br />Emergence of Forward Start Facilities as mechanism to access loan capital<br />Weaker borrowers aiming to leverage the residual value of cheap facilities in exchange for renewed commitments<br />What Happened to Corporate Funding?<br />3<br />
  10. 10. Profile of UK Capital Raising over a Cycle<br />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 <br />UK Corporates Capital Raising<br />$431bn<br />Further funding diversification to come in EMEA? - move toward US DCM focussed financing model?<br />$340bn<br />70%<br />$277bn<br />$279bn<br />$216bn<br />64%<br />$215bn<br />53%<br />70%<br />27%<br />59%<br />$116bn<br />46%<br />38%<br />21%<br />59%<br />26%<br />27%<br />20%<br />22%<br />33%<br />5%<br />6%<br />8%<br /><ul><li>Historically UK corporates very reliant on loan market
  11. 11. During the crisis, availability of bank funding contracted significantly, however more than compensated by record breaking bond market issuance, particularly in 2009
  12. 12. Many UK corporates also forced to access the equity markets (e.g. Wolseley, CRH, Premier Foods, William Hill etc.)
  13. 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. 14. Diversification into other funding less evident again from 2010 onwards - evidence of bank market recovery</li></ul>4<br />___________________________<br />Source: Dealogic as at June 2011<br />Note: Data includes all capital raising by UK corporates i.e. IG & HY, excl. FIG<br />
  15. 15. Evolution of the Loan Market over a Cycle<br />Corporates who continued to rely on the bank market were forced to accept lower liquidity and higher pricing<br />Pricing and volume dynamics over a cycle<br />Average Cycle BBB pricing = 98bps<br />Average Cycle A pricing = 72bps<br />Average Volume = $180bn<br />Average Volume = $100bn<br />Average Volume = $163bn<br />Average Pricing = 29 / 40 bps<br />Average Pricing = 116 / 153 bps<br />Average Pricing = 70 / 101 bps<br />2010 - Today<br />Pre-Crisis<br />Peak Crisis<br />Characterised by benign regulatory environment, robust bank capital levels and resultant high market liquidity<br />Drove highly favourable market conditions for borrowers, and high volumes as corporates took advantage of:<br />Availability of tenor: 5-7 years<br />Pricing lows: fully drawn margin in mid-20bps range<br /><ul><li>Bank capital raisings have repaired balance sheets
  16. 16. Capital supply/demand imbalance develops: available capacity but supply remains low as pricing remains elevated
  17. 17. Leads to competitive market behaviour to win business, and drives downward pressure on pricing
  18. 18. Volumes begin to recover as (i) discretionary refinancing can no longer be postponed and (ii) pricing appears to be stabilising
  19. 19. Loan pricing begins to increase to mirror increase in bank funding costs
  20. 20. Volumes fall sharply in response to higher pricing
  21. 21. Borrowers ceased discretionary refinancings
  22. 22. Acquisition and drawn funding met by debt capital markets
  23. 23. Further consolidation in highly fragmented European bank market
  24. 24. Volumes remain subdued on both supply and demand side
  25. 25. Bank capital raising and low volumes (asset run off) repair balance sheets</li></ul>5<br />
  26. 26. Impact on Loan Market Tenors<br />The profile of loan market tenors changed significantly during the crisis, although today appears to have returned to pre-crisis norms<br />EMEA investment Grade Loan Tenors<br />Loan Market Tenors<br />Historically, a range of tenors up 7 year tenors were available for strong investment grade borrowers<br />5 years more normal, although corporates used a range of tenors, particularly to fund acquisitions<br />Given capital sensitive environment , longer maturities were unavailable for even the strongest borrowers during the financial crisis<br />Return of tenor despite inflationary capital impact of Basel III<br />Testament to relative health of European bank balance sheets<br />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<br />Today’s loan market conditions are generally supportive of corporate refinancings<br />___________________________<br />Source: Dealogic and Barclays<br />6<br />
  27. 27. Where Next for the Loan Market?<br />Current competitive pricing supported by strong technical factors, whilst structural changes in bank market and wider macroeconomic events of increasing concern<br />Strong technical factors<br />Buoyant market sentiment<br /><ul><li>Asset run off as borrowers refinance with smaller facilities
  28. 28. Limited M&A financing to date
  29. 29. Bank lending budgets up 20% on average for 2011
  30. 30. Success of loan transactions in past 12 months
  31. 31. Relationship lending proving to be resilient with careful management of banks and capital ask</li></ul>POSITIVE dynamics<br />Loan market pricing, liquidity and execution risk<br />Regulation<br />Increasing cost of liquidity<br />Cost and availability of bank funding<br />Return of risk aversion? – uncertain macro outlook<br />New rules on liquidity buffers via LCR and NSFR<br />Additional requirements to maintain ‘liquid’ assets costly to banks<br />Higher cost for undrawn lines?<br />LMA lobbying ongoing<br /><ul><li>Renewed volatility and deterioration of some credit indicators
  32. 32. Dampening of sentiment, as evidenced by Central Bank lending surveys?
  33. 33. Cost of bailouts and contagion?
  34. 34. Additional exogenous shocks in macro and geo-political environment
  35. 35. Threat of double dip?
  36. 36. More expensive capital model for banks
  37. 37. New regulation directives yet to be ratified at local level
  38. 38. Impact of super-equivalence?
  39. 39. Impact of future bank stress tests?
  40. 40. Further capital raising by European banks to come?
  41. 41. Withdrawal of Government support schemes
  42. 42. Eurozone “debt crisis”
  43. 43. Costly liability extensions, as imposed by regulators
  44. 44. Elevated bank funding costs for >2 years – a long-term ‘shift’?
  45. 45. Securitised markets yet to recover</li></ul>Bank sector specific CHALLENGES<br />7<br />
  46. 46. Sources of Liquidity haven’t changed<br />Cash/working capital<br />Bank Debt<br />Public Debt<br />Private debt<br />Asset Finance<br />Hybrid<br />Equity<br />8<br />
  47. 47. Lessons Learned?<br />Many corporates got ‘burned’ during the crisis<br />Liquidity management is key<br />Corporates are refinancing earlier to avoid running up against maturities<br />2 -3 years prior to maturity not uncommon<br />Corporates have increasingly diversified funding sources<br />Debt Capital Markets a more important part of the funding mix<br />De-levered balance sheets and increasing cash piles are more common as corporates seek to more actively manage their liquidity position<br />9<br />
  48. 48. What do ‘Best in Class’ Treasurers / CFOs do?<br />No quick fixes<br />Understand business “rhythm”<br />Align capital structure with business strategies and growth opportunities<br />Consider the full spectrum of the capital structure when considering financing decisions<br />Make financing decisions from both a strategic and tactical perspective<br />Recognise that liquidity is king<br />Maintain optionality<br />Communicate regularly with past, current and potential capital providers & rating agencies<br />Engage (and debate) with banks on structuring, not only execution<br />10<br />
  49. 49. Disclaimer<br />Managing Through Crisis<br /><ul><li>Cashflow forecast – lift up every “drain cover”
  50. 50. Engage on multiple fronts – don’t listen to just one advisor
  51. 51. Learn from past – don’t assume crisis lasts forever
  52. 52. Embed within business concepts of cash & liquidity – the company does not have a blank cheque book
  53. 53. Secure liquidity even if it is not yet required – the early bird catches the worm
  54. 54. Ensure the Board is up to speed and able to respond quickly – markets open and shut extremely quickly</li></ul>11<br />

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