Euro crisis puts company funding in tight spot

Fri Nov 25, 2011 11:10am EST
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By Josie Cox and Alex Chambers

LONDON, Nov 25 (IFR) - European companies are in for a tough time next year. The euro zone debt crisis is sparking caution on all fronts, as consumers keep their cash in their pockets, corporate treasurers take a knife to investment plans and investors desperately seek a haven for their wealth.

Banks are curtailing lending to shore up their balance sheets in the face of more stringent capital requirements and caution in the markets means the pool of capital for buying company bonds will be smaller.

Companies needing to refinance their borrowing over the next year will be caught between the loan market 'rock' and the bond market 'hard place', driving up the cost of borrowing, and putting another damper on corporate investment and, by implication, economic growth.

What is certain, is that companies will be leaning on the bond markets more as syndicated loans dry up.

"Our policy is to have a fifty/fifty balance of bank loans to bonds, but in the current environment we have a bias toward bonds," said Jean Chausse, group treasurer of French retailer Auchan, which this week launched a 3 pct, 600 million euro, five-year bond with a coupon 0.4 pct higher than where its existing bonds were being quoted.

One bank active in the loans market said average fully used loan pricing for single A-rated companies has risen by 50 percent from around 80bp to 120bp over money market benchmarks. That 120bp is still well below where most banks are funding themselves in the wholesale market, highlighting the pressure banks are under to curtail loss-making loans.

"It is clear that a number of loan market participants are acting in a more selective fashion," said Mark Lewellen, head of European corporate origination at Barclays Capital. Many banks have announced programs for shrinking risk-weighted assets.

"In investment grade, there will be an inexorable shift in corporates accessing the bond market," said Michael Grayer, managing director at Lazard, adding that some had yet to fully factor in the impact of bank balance sheet deleveraging on their own funding costs and strategies.   Continued...