1 ROLAND BERGER STRATEGY CONSULTANTS CONTENT Fresh thinking for decision makers Corporate financing is more challenging than ever Only a long-term strategy can successfully meet the challenge Structuring financing in line with the business model and using alternative instruments offers real competitive advantages Roland Berger launches a new Corporate Finance CC NOVEMBER OKTOBER
2 THE CORPORATE FINANCE COMPETENCE CENTER: WITH OVER YEARS OF CONSULTING EXPERIENCE IN TOTAL AND MORE THAN SUCCESSFULLY COMPLETED PROJECTS WORLDWIDE. CORPORATE FINANCING IS FACING NEW CHALLENGES CONSULTANTS IN GERMANY and a sharp increase in complexity. To meet the needs of our clients, we have created a new Corporate Finance Competence Center at Roland Berger Strategy s. The Corporate Finance CC brings together our many years of experience in all areas of corporate finance, in particular: Financial advisory Support for M&A and private equity Value creation We are the people to speak to whether you need to identify new investment targets, integrate and develop them, optimize your capital structure, carry out an IPO, manage your financing risk or place a new focus on portfolio or value management. Working closely with the Roland Berger network, we offer comprehensive solutions and a high level of market and implementation competence. CORPORATE FINANCE - THE NEWEST COMPETENCE CENTER OF THE ROLAND BERGER NETWORK Our global perspective based on international experience and expert knowledge ensures innovative yet pragmatic business solutions. INDUSTRY CC FUNC- TIONAL CC Corporate Finance Corporate Performance Marketing & Sales Operations Strategy te Automotive Energy & Chemicals Consumer Goods & Retail Financial Services InfoCom Pharma & Healthcare Transportation Civil Economics EPHT Source: Roland Berger Strategy s
3 CONTENT Corporate financing I. THE AFTERMATH OF THE CRISIS Since the middle of the last decade, corporate finance has involved ever large sums of money and a steadily growing choice of financing instruments. New borrowing in Germany was EUR 745 billion in 2005, compared to more than EUR 1.1 trillion in 2008 at the time of the last economic peak. Despite a fall caused by the crisis, 2010 will again see volumes of borrowing well above the level of 2005, at between EUR 830 and 910 billion. Demand is strong. But the global economic and financial crisis has made it much harder for companies to get their hands on the capital they need. The good news is that Germany and some other countries are showing signs of economic recovery, albeit somewhat fragile at the moment. To turn this into a long-term growth trend, companies need a solid financing basis giving them sufficient room for maneuver to exploit market opportunities and set their sights firmly back on expansion. In the aftermath of the crisis, companies particularly small and mediumsized enterprises (SMEs) find themselves in a tricky position. EXTERNAL FINANCING The availability of equity and dept is limited $ LIMITED INTERNAL FINANCING CAPABILITIES In terms of internal financing, the crisis has considerably weakened firms. Sinking operating earnings have eaten into cash reserves. As the economy slowly recovers, companies need to increase working capital and investments both of which require financing. LIMITED AVAILABILITY OF EQUITY AND DEBT On the one hand, the availability of equity on the capital markets is limited. IPOs are difficult due to the high level of volatility and uncertainty persisting on stock markets. The same goes for increases in equity, for which it is difficult to drum up support. Access to debt has also become more difficult. Banks are less willing to loan, credit terms have become tighter and interest rates have risen as credit ratings have suffered. It is unclear at present what the precise impact of stricter equity requirements for banks under Basel III will be but they are unlikely to make it any easier for businesses to secure external financing. SECURING A SOLID FINANCING BASIS IS MORE IMPORTANT AND MORE COMPLEX THAN EVER BEFORE Getting the balance between internal and external financing right is no easy matter THE COMPLEXITY OF FINANCING IS INCREASING Companies must reckon on facing greater limitations with regard to financing in the coming period. For current and future refinancing projects, the level of permissible debt will be lower than before the crisis. Financing and collateral structures have become more complex and a need for refinancing has arisen for example as mezzanine programs have come to an end. Securing a solid financing basis is more important and more complex than ever before. It is a central decision-making area for companies and must be placed at the top of the agenda. Businesses need to find the best possible solutions to the inescapable challenges. To choose the right financing instruments, they need to understand the specific situation they find themselves in.
4 ROLAND BERGER STRATEGY CONSULTANTS To answer these questions, a new Roland Berger study investigates the financial position of German SMEs after the crisis and what they can do to meet their future financing needs in a smart, sustainable manner. In this edition of think: act CONTENT we present the key findings of the study and our recommendations for action. ALMOST HALF OF THE COMPANIES IN THE SURVEY SAW THEIR RATINGS CHANGE LAST YEAR CHANGES TO RATINGS Better No change Worse Source: Roland Berger study THE MAJORITY OF COMPANIES IN THE SURVEY ARE FOCUSING ON GROWTH ISSUES FOCUS ON Growth only Refinancing and growth Refinancing only II. GERMAN SMES BUILD A BASIS FOR GROWTH Experts were largely united in their skepticism about Germany's position during the crisis and shortly afterwards. International bodies such as the IMF, German banks and other observers forecast slow growth in 2010 and Even this faint optimism was ringed with provisos. It wasn't until the surprisingly good figures for the first half of 2010 were published that growth expectations improved and edged above the 3% mark. Our survey of 300 SMEs found that companies in Germany are setting their sights once again on expansion. In fact, they started doing so even as the experts were warning of further economic troubles. We found clear evidence that companies survived the crisis much better than could have been expected during the global economic turbulence. Overall, ratings and collateral requirements did not worsen; indeed, a substantial number of respondents report better ratings than ever before. However, among companies having to renegotiate loans during the crisis, the proportion facing new restrictions due to stricter covenants was 43%. The irony, of course, is that companies need fewer restrictions not more over the coming months. Growth has moved up the agenda. It is the main thing driving financing in 2010 and A remarkable 61% of companies in the survey said that growth is the sole focus of their financing, while just 5% list refinancing as a central topic for 2010 and We found the same thing across all industries, with very little variation. Some 37% of firms expect their net financing requirement to be higher in 2011 than in 2009, and 6% say it will be "much higher". They generally explain this in terms of increasing working capital and making larger investments so as to exploit the opportunities offered by the global economic recovery. Clearly, German SMEs believe they have great growth prospects. At the moment, however, they often decide how to finance this growth on a case-by-case basis, snapping up offers where they see them. Just 28% of companies in the survey implement a long-term financing strategy. Here we found clear differences between industries: the automotive industry generally has an eye to the future, while the majority of service companies act in a rather more ad hoc manner. When choosing financing instruments, companies evidently want to keep things as simple as possible. The size of the business plays a key role. Larger SMEs draw on a wider repertoire
5 CONTENT Corporate financing of financing instruments; smaller SMEs focus more exclusively on equity and bank loans. But bank loans are also a preferred type of financing for larger companies. Companies that report failure to secure bank loans in recent months generally turn to their shareholders for help. Additional loans, increasing capital and leasing agreements are popular alternative sources of financing. But almost one in five companies say that they did not turn to an alternative source of financing, giving up on the planned project and carrying on with day-to-day business without the help of additional capital. That, at least, is a pragmatic approach. But it also reveals the major demand for financing and hence potential that is being neglected as the recovery gets underway. A complex picture, no doubt about it. But one thing is clear: the situation with regard to financing and the related requirements are changing fast. To profit from the economic recovery, companies not only need to sniff out opportunities on the market. They must also keep their need to secure suitable funds at the front of their minds. A PRAGMATIC APPROACH - CAUSED BY A LACK OF OPTIONS 1in5 Almost companies carried on business without the help of additional capital. Source: Roland Berger Study III. OUR RECOMMENDATIONS FOR FUTURE-PROOF FINANCING No two companies are alike when it comes to financing needs. But the lesson of the crisis is relevant for everyone. Three basic rules apply: Employ a long-term financing strategy Structure your financing in line with your business model Use alternative financing instruments What does this mean in practical terms? To find out more, read on. 1. EMPLOY A LONG-TERM FINANCING STRATEGY The companies that stick closely to a long-term financing strategy currently form a minority. However, our study shows that a long-term financing strategy generally allows firms to optimize their financing conditions and structures. This optimization must be seen in relation to corporate strategy, involving the interplay of structures, conditions and risk. Almost half of the companies in the survey who followed a long-term strategy experienced benefits in the form of better conditions, a good rating, less complexity, lower risk and a solid, trust-based relationship with the providers of financing. This puts them in a much stronger position than their competitors with regard to the challenges of increasing financing volumes, keeping ratings stable and minimizing the risks of follow-up financing. German SMEs are tough cookies. They know how to make the best out of a bad situation. Many SMEs are not expecting the situation to get better any time soon. The companies in the survey identified four key challenges for the future: 1. Raising the volume of financing a key challenge for 13% of firms 2. Improving their rating 12% 3. Refinancing financing agreements that are soon to expire 10% 4. Coping with increased financing costs 9%
6 ROLAND BERGER STRATEGY CONSULTANTS LIKE IN CHESS A long-term strategy is the key to winning For 50% of companies in the survey, existing financing arrangements will come to an end in the next two to five years. At the same time, most companies expect their financing needs to expand. Companies must start focusing their attention on where their financing will come from in two to five years time. Increasing financing volumes cannot be secured on an ad hoc basis especially where there is competition on capital markets. Companies need to assess and structure their financing requirements as part of a long-term financing strategy. They should be guided in this by the objective benefits of a long-term perspective rather than being seduced by the subjective positive feelings of an ad hoc approach. 2. STRUCTURE YOUR FINANCING IN LINE WITH YOUR BUSINESS MODEL Our study found that small companies in particular tend to take an ad hoc approach to financing. They view covenants, reporting requirements and winning the trust of the providers of financing as the main challenges facing them in the period ahead. Large international companies, on the other hand, structure their financing around centralized companies or holding companies and foreign subsidiaries. Companies should structure their financing in line with their business model. They should focus their attention on the key components of a conservative financing structure, including maturity matching, balance-sheet and debt ratios, balanced costs and minimal dependency on individual providers of financing. As they make more and more use of alternative financing instruments, they need to integrate these into an overall financing structure. IN FOCUS Structure your financing in line with your business model This is true also for financing direct investments or exports of German SME. In the past, these activities were mostly financed by German banks and transferred via intragroup loans. International financing becomes local, integrating regional banks. For companies that take the long-term view, structured financing is essential for ensuring transparency and manageability. Structuring builds trust with the providers of financing and at the same time reduces administration. Ad hoc financing arrangements may look more simple and affordable on paper, but they can have a negative impact on the financing structure and lead to expensive one-off solutions. The right structuring also enables companies to cushion the impact of external factors such as currency and country risks more effectively, thereby reducing the burden on operations. 3. USE ALTERNATIVE FINANCING INSTRUMENTS Small companies, due to their size and regional focus, often concentrate on traditional bank loans for their financing needs. However, banks are finding it more difficult to meet demand in the current difficult economic situation than during the preceding period of growth. As a result many of the companies in our survey say that they cannot secure big enough bank
7 CONTENT Corporate financing loans, or even have difficulty getting any at all. Often they fail to identify alternative sources of financing. Consequently projects fall by the wayside or rely on ad hoc financing, which brings with it a much higher risk of failure. Larger companies, by contrast, are making increasing use of alternatives to traditional bank loans. These alternative instruments give them more room to maneuver. They enable them to diversify their financing basis, spread risk and achieve greater flexibility. What is more, many of these alternative financing instruments are no more complicated in terms of their structure and application than large bank loans. IV. LONG-TERM STRUCTURED FINANCING A TRUE COMPETITIVE ADVANTAGE The general credit crunch widely predicted as a result of the financial crisis has not materialized. Nevertheless, managers are paying more attention now to robust corporate financing that looks beyond the short term. Ad hoc attempts to secure financing as quickly as possible so as to tie up fewer resources and not miss out on any opportunities is short-sighted. It can even put the very survival of the company at risk. Developing a suitable financial structure takes more time. In the case of smaller companies, it may require bringing in external expertise. But it is an effective way to manage refinancing risks and balance interest costs and the expense of meeting reporting obligations. Taking an approach that looks beyond traditional sources of financing also allows companies with production plants in different countries to build a natural hedge against currency fluctuations. This is a complex task that offers considerable benefits in the medium to long term compared to what appear at first sight to be simpler solutions. Companies that wish to tap the potential of the current recovery should not drag their heels over this. They need to quickly develop the solution that suits them best. In previous periods of economic growth, German companies were somewhat slow off the mark compared to their international competitors. This time around many firms have boldly implemented tools such as short working time as a way of protecting their workforce and ensuring that they can ramp up capacity as soon as the crisis eases. Now they are making the most of the opportunities this has given them, confident that recovery will follow swiftly. They should take the same courageous, long-sighted approach to reviewing their financing needs. Where they see problems ahead, they should not be afraid of making far-reaching changes. USE ALTERNATIVE FINANCING INSTRUMENTS While small companies often rely on few banks and financing instruments big companies enjoy a wide range of different financing options PLEASE CONTACT US SHOULD YOU HAVE ANY QUESTION Dr. Sascha Haghani, Partner und Head of CC Corporate Finance Dr. Klaus van Marwyk, Principal Jürgen Müller, Senior Project Manager Johannes von Neumann-Cosel, Senior think:act CONTENT Editors: Prof. Dr. Burkhard Schwenker, Dr. Martin C. Wittig Overall responsibility: Torsten Oltmanns Project management: Dr. Katherine Nölling Layout: Roland Berger DesignTeam Roland Berger Strategy s GmbH Am Sandtorkai Hamburg
8 Would you like to get your copy of think:act CONTENT faster? Send your address to us at and you will receive the next issue in advance!