Corporate financing in Europe and the role of banks

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1 Corporate financing in Europe and the role of banks Hitotsubashi University 24 June 2015 Matthew Grayson, General Manager, Global Institutional Banking Department, SMBC

2 The role of banks in the economy If the economy is like a large machine made up of many companies, banks and financial services are like the oil in the machine 1

3 Company balance sheet Banks support many areas of the company s business Assets USDm Liabilities USDm Cash 10 Short term loans 5 Accounts receivable 30 Accounts payable 45 Inventory 15 Current assets 55 Current liabilities 50 Buildings 15 Long term loans 25 Plant & machinery 30 Bonds 10 Fixed Assets 45 Share capital 15 Total assets 100 Total Liabilities 100 2

4 Banking services for companies Cash - Cash accounts, deposits - Domestic payments, foreign payments, cash management International trade - Letters of credit, trade guarantees - Export finance, supply chain finance Risk hedging - Foreign exchange spot / forward FX. FX options - Interest rate swaps. Hedging for other risks eg oil & commodities prices Financing - Short term / medium term loans (secured / unsecured) (fixed / floating rate) - Syndicated loans / bonds / asset-based financing / project financing 3

5 Financing 1 Some loan vocabulary - Short Term or Medium/Long Term? - Secured or Unsecured? - Fixed or Floating Rate? - Revolving or Term Loan? - Bullet Repayment or Amortizing? - Committed or Uncommitted? - Bilateral, Club or Syndicated? - Underwritten or Best Efforts? 4

6 Financing 2 Syndicated loan Borrower Principal Interest Arranger / Agent P&I P&I P&I P&I Bank Lender Bank I Lender Bank Lender Bank Lender Homework: Benefits for borrowers? Larger size, flexible structure Benefits for banks? More profitable than bilateral, share risk with others Fact: The largest ever syndicated loan was USD61bn to Verizon Communications to support its acquisition of Vodafone s 45% share in Verizon Wireless for USD130bn 5

7 Financing 3 Bond issue Issuer (Borrower) Arranger / Underwriter Issue amount Interest (coupon) Agent Issue amount Investors (Lenders) Interest (coupon) Syndicated loans - Mostly a banks market - Flexible for borrowers - Can be sold but slower Bonds - Many investor types - Fixed term, fixed repayment - Easy & quick to buy / sell Fact: The largest ever corporate bond issue was Verizon Communications US$49bn issue in

8 Financing 4 Comparison of US and Europe $78 trn Conclusion: European companies rely much more on bank debt than on bonds. But it is changing 7

9 Corporate financing in Europe after the financial crisis Crisis caused by banks becoming too big with too little capital Banks must reduce their assets and grow their capital Banks unable to lend as much as before, become very cautious Companies have to become less reliant on bank financing Companies start shifting from syndicated loans to bonds 8

10 Shift from bank financing to capital markets financing Bank lending to European companies shrank about USD600bn Conclusion: Europe may be moving towards a more US type model? 9

11 What are Japanese companies doing overseas? Strong growth in outward M&A Main drivers are: - Demographics - High Yen (??) - Cash, cheap debt Cash held by Japanese companies USD 1.9 trillion.. About the same as Russia s GDP! 10

12 Some recent examples Japan Post agrees to $5.1 billion takeover of Australia's Toll Holdings 11

13 Activities of Japanese companies in Europe? Industrial manufacturing Auto, components, electronics, glass, machinery etc Cash accounts Cash management Transportation Rail, shipping, aircraft Short term loans Long term loans Infrastructure Bridges, power, hospitals Asset financing Project finance Consumer / retail Clothing, apparel, fashion, food/drink Foreign exchange Interest rate swaps M&A 12 Pharma, drinks, machinery, glass, gaming, energy, telecom, chemicals Guarantees Letters of credit

14 Strengths of SMBC in Europe Financial strength: - Strong capital base - Ability to do long term finance Reputation: - Reliable, long term partner - Good team player, good employer Product, sector excellence: - Long term project finance - Energy, infrastructure Deep, long-term customer relations: - Japanese, other Asian customers - Top level European companies 13

15 End Questions, please! 14

J. Gaspar: Adapted from Jeff Madura International Financial Management

Chapter3 International Financial Markets J. Gaspar: Adapted from Jeff Madura International Financial Management 3-1 International Financial Markets Can be segmented as follows: 1.The Foreign Exchange Market