Hunting credit, firms look beyond wary EU banks
By Steve Slater
LONDON (Reuters) - When David Armitt needed to refinance loans last year for his 153-year-old manufacturing company in Yorkshire, he found British banks reluctant to lend. So he took the nuclear option.
The finance director in Huddersfield turned instead to San Francisco-based Wells Fargo (WFC.N: Quote), borrowing $28 million after putting up as collateral the gearboxes that his firm, David Brown Gear Systems, makes to propel nuclear submarines.
European Union banks have shrunk their loan books by over $5.5 trillion, more than a tenth, since the global crisis of 2007-08, cutting risk on their balance sheets but choking off credit to companies and stalling the region's recovery.
Faced with this retrenchment, businesses have looked elsewhere for alternatives, using asset-based loans and turning to bond markets, private equity firms, insurers, their own suppliers and even crowds of private savers to raise funds.
And although many EU banks deny holding back, blaming weak demand for the decline in credit, such diversification by companies away from bank lending seems here to stay, even once the retrenchment in bank balance sheets comes to an end.
In a region where banks previously accounted for almost two thirds of corporate funding - double the level for their U.S. counterparts - that is a major opportunity for other lenders.
"Companies have latched on to the fact that they need to diversify," said Richard Cranfield, who advises corporate clients on financing at law firm Allen & Overy in London. "I don't think that toothpaste is going to go back in the tube.
Estimating that banks may only be half way through a decade of modification in their business models following the global crash, Cranfield added: "They are still adjusting, still simplifying their structures and getting out of certain businesses and that keeps pressure on ... where they can lend." Continued...