Rolf Michon, Managing Partner, and Richinel van Aanholt, Consultant, Orchard Finance Consultants This article discusses four measures a company can take to increase the availability and continuity of financing: strengthening the balance sheet, extending the maturity profile of debt, strengthening the liquidity position and diversifying funding sources. The data of large Dutch firms shows that most companies have taken all or most of these measures since 2009. The data of S&P 500 companies puts this in perspective and also shows massive deleverage of US listed firms. Diversification of funding sources, however, remains a hot topic. A recent survey amongst the largest Dutch corporations shows that 80% of the respondents expect to issue debt capital instruments within the next five years. A More Conservative Financing Policy the execution of its strategic derived from this purpose are: To secure the availability of from running into liquidity problems and to enable the execution of the strategic goals. To maintain a certain react to unexpected circumstances, to facilitate opportunities. To realise competitive maintaining competition and by optimising the capital structure. Since the end of 2008, the from a focus on optimising costs to a more conservative approach, securing availability. In the years thereafter, this focus on availability has become even stronger. A more following measures: Strengthening the balance sheet be dedicated to cash dividend and/or share buy backs. Debt be limited to conservative leverage ratios. Dilution of earnings per share in the short term should not hinder equity value positive investments. Extending the maturity profile of debt Debt capital markets provide longer tenors, but are expensive compared to bank debt. In the tenor, more emphasis should be put on tenors. Since the end of 2008, the emphasis in finance has shifted from a focus on optimising costs to a more conservative approach, securing availability. Maximising Business Opportunities in Asia, Africa and the Middle East a Treasurer s Guide 221
If liquidity is scarce, the company should place extra emphasis on cash management, ensuring visibility and control over cash and an up-to-date and reliable cash and liquidity forecast. Strengthening the liquidity position Increase the cushion between cash and headroom under committed credit facilities versus forecasted cash positions and short-term repayment obligations. If liquidity is scarce, the company should place extra emphasis on cash management, ensuring visibility and control over cash and an up-to-date and reliable cash and liquidity forecast. Diversifying funding sources Apart from longer tenors, debt capital markets can reduce dependency on bank debt. In the current turbulent problems of banks are such that many banks are not in the best position to provide longterm funding. Even if market circumstances improve, the implementation of the liquidity coverage ratio and the net stable funding ratio of the Basel III package will limit the possibilities and willingness of banks to provide long-term The remainder of this article discusses the aforementioned measures in more detail, illustrated by data on large Dutch corporates. 1 Data from S&P 500 companies 2 are used to put the Dutch companies in an international perspective. Strengthening the Balance Sheet In 2009, most Dutch companies in our sample took swift measures to cut costs (by introducing cost reduction programmes) and to free cash by rationalising investments capital. Furthermore, share repurchases came to a standstill and cash dividends were decreased in order to use the free cash to repay bank debt. These measures were very effective and enabled companies to manage their the net debt to earnings before interest, tax and amortisation (EBITDA) ratio hardly increased and the solvency ratio improved in 2009 (see Figure 1). As a result of the cost cutting in 2009, economic recovery record levels in 2010. Again, further strengthen the balance sheet, resulting in record equity levels and a substantial deleveraging. Figure 1 shows that total equity combined for all indices was EUR105.0bn at the end of 2008 versus EUR128.6bn at the end of 2010. Historically, US companies than continental European companies. At the end of 2007, 222 1 The data is derived from the Orchard Finance Monitor, a database with financing details of large Dutch corporates. The data in this article includes 37 publicly traded non-financial firms of the AEX (17 firms, excluding ArcelorMittal and Shell) and AMX (20 firms) and the 20 largest non-listed firms (excluding commodity traders and private equity owned firms). All amounts in figures and tables in this article are denominated in EURbn, unless expressly stated otherwise. 2 S&P Capital IQ Markets Observations February 2012 Standard Chartered Insights 2012
Figure 1: Financial Ratios for Large Dutch Corporates Solvency Leverage AEX AMX Non-listed AEX AMX Non-listed 50% 48.2% 3.0 45% 43.6% 42.7% 43.6% 2.5 2.26x 2.35x 40% 39.5% 2.00x 2.0 2.21x 2.19x 1.74x 38.1% 1.81x 35% 33.5% 1.5 1.74x 1.76x 35.7% 1.52x 30.1% 32.9% 32.6% 1.31x 30% 1.0 29.8% 0.64x 25% 0.5 Equity 2007 2008 2009 2010 AEX 88.6 69.3 75.2 90.0 AMX 10.9 10.4 11.2 13.2 Non-listed 24.2 25.3 24.2 25.4 Net debt 2007 2008 2009 2010 AEX 19.4 54 46.4 45.4 AMX 6.2 7.7 6.0 6.4 Non-listed 8.8 12.7 11.4 11.4 Source: Orchard Finance Monitor 3 S&P 500 companies had an average leverage (net debt/ EBITDA) of 2.6 compared 500 companies started to strengthen their balance sheets in 2008, driving leverage down to an average 1.5 by the end of 2010 and a historical low of 1.1 by the end of 2011. Based on this data it seems 500 companies and large Dutch companies have become more aligned and that they both have adopted and reached conservative leverage targets. Extending the Maturity Profile of Debt In addition, in 2009 Dutch companies with investment grade credit ratings still tapped public bond markets despite high credit margins, to secure long-term debt and of their debt funding. This trend continued in 2010 and 2011, as the number of Dutch companies active in the debt capital market increased. New issuers were non-rated companies such as Boskalis, Logica, Arcadis and Imtech, S&P 500 companies started to strengthen their balance sheets in 2008, driving leverage down to an average 1.5 by the end of 2010 3 The data in the figures and table are either averages (in case of ratios and percentages) or total sum per index (e.g. the sum of the equity of all included AEX firms). Maximising Business Opportunities in Asia, Africa and the Middle East a Treasurer s Guide 223
During the course of 2010, liquidity in the banking market returned, with banks offering lower margins, looser covenants and longer tenors to investment grade companies. placements with predominantly US investors. In effect these new instruments have substantially extended their During the course of 2010, liquidity in the banking market returned, with banks offering lower margins, looser covenants and longer tenors to investment grade companies. In 2011, liquidity in the banking market improved even further. These circumstances continued until August 2011. Between August 2011 and February 2012 liquidity in the banking markets was decreasing; in March 2012 it appears that the bottom of the liquidity crunch has been reached. All of the 2011 and most of the 2010 bank debt transactions of of them with extension options for two additional years). In conclusion, the combination of increased debt capital markets transactions and the debt create a relatively long Figure 2: Size and Headroom of Credit Facilities 2009 2010 100% 100% 80% 80% 60% 15.2 4.7 60% 20.6 5.8 6.3 40% 40% 20% 3.4 2.6 20% 3.3 2.3 2.1 0% 1.2 AEX 0.7 AMX Non-listed 0% 1.9 0.4 0.5 AEX AMX Non-listed Credit facilities Utilisation Loans 19.8 8.0-4.6 3.4-9.4 1.4 - Credit facilities Utilisation Loans 25.8 8.4 8.9 5.2 2.6 2.6 9.2 1.6 1.4 Undrawn portion of available credit facilities Drawn portion under committed credit facilities Drawn portion under uncommitted credit facilities 224 Source: Orchard Finance Monitor Standard Chartered Insights 2012
Strengthening the Liquidity Position The aforementioned funding transactions were also used to improve the liquidity position. The cash holdings average EUR1.5bn at the end of 2010 from EUR1.2bn at the end of 2008. Again, S&P 500 companies show a similar pattern, with cash holdings increasing to an average EUR2.6bn at the end of 2011 from EUR2.2bn at the end of 2007. For our total sample of large Dutch corporates the cash position exceeded short-term end of 2010. This implies that invested capital (including net working capital) completely with long-term capital (longterm debt, provisions and equity). In addition, liquidity in the banking market allowed the their credit facilities (see Figure 2). Total credit facilities EUR19.8bn at the end of 2009 to EUR25.8bn at the end of 2010, increasing headroom by EUR5.4bn to EUR20.6bn at the end of 2010. We can conclude that large Dutch corporates have a strong liquidity position with substantial cash holdings and credit facilities. Diversifying Funding Sources Although the above described increased debt capital market activity has reduced sources remains a hot topic for In November 2011, Orchard Finance Consultants sent a survey to CFOs and group treasurers of large Dutch corporations. 4 Of these large of the S&P 500 companies (see explained by the distribution average non-rated companies lack the scale to successfully tap public debt markets have an average total debt of EUR0.6bn). The composition of the total interest-bearing debt for large Dutch corporations (see Figure 4) shows that rated companies have successfully reduced their reliance on bank Although the above described increased debt capital market activity has reduced dependency on bank financing, diversification of funding sources remains a hot topic for Dutch firms. 4 For the survey, large corporates are defined as listed corporates (on Euronext Amsterdam) and non-listed corporates that have at least EUR400m of revenues and EUR50m interest-bearing debt outstanding. In total, 107 firms received the survey of which 42 were returned by either the CFO or the group treasurer. The response rate of 37% illustrates the importance of this choice between bank debt versus non-bank debt. 18 of these 42 corporates are listed. The respondents have an average revenue of EUR2.8bn per year over the sample period 2006 2010. Average total assets over this period amounts to EUR3.1bn per year and the average amount of interest-bearing debt outstanding amounts EUR0.9bn. Maximising Business Opportunities in Asia, Africa and the Middle East a Treasurer s Guide 225
Figure 3: Rating Distribution and Total Debt Size Distribution by rating Rating AAA AA A BBB BB B and below NR Count by rating in % S&P 500 Companies Average Total debt total debt Large Dutch corporates Count by rating in % Average Total debt total debt (in#) in USD bn in USD bn (in#) in USD bn in USD bn 4 1% 48 12.0 2 2% 2 1.2 17 3% 732 43.1 2 2% 6 2.8 143 29% 4,437 31.0 6 6% 23 3.8 207 41% 1,287 6.2 8 7% 30 3.8 50 10% 320 6.4 2 2% 1 0.4 9 2% 58 6.5 2 2% 4 2.1 70 14% 59 0.8 85 79% 53 0.6 Total 500 100% 6,940-107 100% 119 - Source: Orchard Finance Monitor, data as of the end of 2010 and S&P Capital IQ Market Observations, data as of the end of 2011 For the smaller companies in the survey sample bank debt remains the dominant and sometimes only source of funding. 226 debt. The debt capital market is the primary source of funding companies. In addition to debt capital markets these rated providers. Non-rated companies on the contrary are still very dependent on bank debt, only market debt. The non-rated companies with access to debt capital markets were the larger companies in the subsample (with an average total debt of EUR1.6bn compared to EUR0.5bn for all non-rated Heineken was one of the larger non-rated companies. However, on 7 March 2012 Moody s and Standard & Poor s assigned an investment grade credit rating (Baa1 and BBB+, respectively) to Heineken, followed by a Notes with a seven-year and 12-year term. For this reason Heineken is excluded from Figure 4. For the smaller companies in the survey sample bank debt remains the dominant and sometimes only source the respondents expect that obtaining bank funding will of Basel III requirements. These companies feel the need to reduce their dependency possibly or certainly issue or continue issuing debt capital market instruments within the In addition to reducing their dependency on bank debt, the face a second challenge. For debt capital markets their only alternative seems to consist of US and UK investors. Standard Chartered Insights 2012
Figure 4: Share of Capital Market Debt in Total Debt Portfolio With a credit rating Large Dutch corporates Sample Number of companies All companies 22 - Number of companies Debt capital market issuers 17 77% Total sample Interest-bearing debt (in EUR bn) All companies 65.9 - Inerest-bearing debt (in EUR bn) Debt capital market issuers 63.6 Of which capital market debt (in EUR bn) All companies 49.5 75% No credit rating 84-12 14% 43.6-18.7 4.8 11% Per company Avg. interest-bearing debt (in EUR bn) Avg. interest-bearing debt (in EUR bn) Avg. capital market debt (in EUR bn) All companies Debt capital market issuers Debt capital market issuers 3.0-3.7 2.9 78% 0.5 1.6-0.4 26% Source: Orchard Finance Monitor, data as of the end of 2010 and S&P Capital IQ Market Observations, data as of the end of 2011 (strongly) agreed that the attractiveness of debt capital increase if alongside the UK and US debt capital markets a European debt capital market would develop. of a developing Asian debt capital market for European companies can be witnessed. In September 2009, Vopak issued new senior unsecured Private Placement market of SGD210m (approximately EUR102m). During 2010, Vopak issued new senior unsecured Notes in the Asian Private Placement market. In November 2010, SGD225m (approximately EUR125m) seven-year Notes and in December 2010 JPY20bn (approximately drawn. Unilever s yuan bond is the multinational. The Notes, issued in Hong Kong for institutional investors, have an approximate equivalent value of Concluding, the smaller sources. Dependency is slowly reducing, but still remains on an undesirable high level. Larger and rated companies capital markets. Companies For the larger firms in the sample the first glimpse of a developing Asian debt capital market for European companies can be witnessed. Maximising Business Opportunities in Asia, Africa and the Middle East a Treasurer s Guide 227
Companies with a presence in Asia, such as Vopak and Unilever, have successfully tapped the Asian debt capital market. with a presence in Asia, such as Vopak and Unilever, have successfully tapped the Asian debt capital market. Outlook The current economic environment is very uncertain. On average, large Dutch corporates have a very solid foundation to meet these circumstances: balance sheets are strong, leverage levels are conservative, liquidity positions are high and the debt portfolios Compared to S&P 500 companies most of the large Dutch corporations are non rated and are more dependent on bank debt as their primary funding source. These companies have stressed their ambition to invest in their ability to access different debt capital markets. In this process banks will play a role. We expect that the banking group of Dutch internationally orientated. banks with more international presence or a presence in Asia. Asian banks will take initiatives as well. In January 2011, China s ICBC, the largest bank in the world, opened a branch in the Netherlands. Soon thereafter ICBC started participating in syndicated Rolf Michon Rolf Michon has been a managing partner of Orchard Finance Consultants in the Netherlands since 2003. After his business administration education at Twente University, the Netherlands, Mr Michon worked for Rabobank as a corporate banker. Before joining Orchard, he was an independent consultant at Van Den Boom Group and NIBC. Richinel van Aanholt Richinel van Aanholt is a consultant at Orchard Finance 2010 after obtaining his Master s degree in Financial Management at Tilburg University, the Netherlands, in 2009. Orchard Finance is a leading Dutch consultancy company focusing offering consultancy, project management, interim operational support and education. 228 Standard Chartered Insights 2012