Europe’s mid-market needs €3.5tn funding by 2018

Medium-sized European companies will struggle to meet their multi-billion financing needs in the next few years, as banks reduce their lending to the sector, according to Standard & Poor?s Ratings Services.

Mid-market companies are increasingly seeking to diversify their funding sources as banks embark on a de-leveraging process that may take many years. But the alternatives to bank funding for mid-market companies in Europe form a cluttered and incohesive landscape. In addition, most direct funding is still mainly aimed at larger companies.

S&P has launched Europe?s first credit benchmark aimed at increasing the transparency and comparability of mid-sized companies ? accounting for around one third of Europe’s economy and employment ? from a credit perspective, which may help facilitate access to new sources of capital market funding.

?European businesses have traditionally relied on bank funding, but deleveraging and tightening regulation are creating a scarcity of finance for European companies, and the problem is particularly acute for medium-sized businesses,? said Alexandra Dimitrijevic, managing director, Standard & Poor?s. 

?While larger corporates have easier access to finance and much smaller companies are the focus of a variety of policy proposals, medium-sized businesses or the ?squeezed middle? appear to be falling into the gap between them.?

The scale of the problem facing this ?squeezed middle? of the corporate sector is significant. S&P estimates that European medium-sized businesses will need to raise up to ?3.5tn in debt funding over the next five years. About ?2.7tn of this relates to refinancing existing loans, with the remaining ?800bn needed to support capital investment and expansion plans between now and 2018. This equates to about a third of total debt currently owed by non-financial companies in the region.

To ease the funding pressure facing these companies, new mechanisms are being developed in Europe to channel funding from investment and other non-bank institutions, including the nascent but growing European private placement markets and the launch of new bond exchange platforms in countries like France, the UK, Italy and Spain. 

Even a five per cent contribution to the financing requirements of these companies from various alternative funding sources would amount to a meaningful ?35bn each year. However, despite a growing interest from institutional investors to invest in this new asset class, they are often deterred by the lack of transparency of the credit risk of mid-sized debt issuers.

Colin Tyler, chief executive of the Association of Corporate Treasurers, said: ?Large companies have been raising significant amounts of new funding in the international bond markets but this has been more difficult for mid-sized companies where smaller issue sizes and lack of clarity on credit risk have discouraged investors. Standard & Poor?s new Mid-Market Evaluation is therefore a welcome development and one which should stimulate mid-market issuance across Europe.?

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