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Since economic recovery and lower unemployment require small and mid-size companies to be more competitive, these firms have to improve their ability to invest and to hire new employees.
But the international financial crisis highlighted the specificities and fragility of the way they are financed. That is the subject of the first section of this issue, in which the authors analyze the obstacles to financing for small and mid-size companies (SMEs). The second section examines more specifically French SMEs, their difficult financial situation, their too low level of productive investment, and the diminishing volume of bank loans. Do financial markets constitute a sustainable alternative for financing SMEs? This is one of the questions raised in the third section, which concerns the establishment in France of a bond market dedicated to small companies, the dynamic character and risks of the bond offerings of German SMEs and Mittelstand firms, as well as Alternext and the Alternative Investment Market. The last section of this issue is devoted to the effects of the implementation of Basle III on credit supply, to alternative sources of financing (Euro PP, securitization, and so on), and to the action of the European Investment Bank.
For this issue, the Revue d’économie financière has called on various authors, economists and academics specialized in the financing of businesses and SMEs, economists from the Bank of France, as well as bankers and market professionals.
publication : June 2014 294 pages
Many questions have found no answer yet regarding SMEs financing. Actually SMEs present specific features giving rise to real constraints and leading to a financial gap. These specificities are the result of economic and behavioural characteristics and raise obstacles to their financing: a lack of information, a lack of incentives to growth and a lack of risk taking behaviour of financial institutions. But the structures of the French financial system are also a major explanation of this financing gap. Despite numerous dedicated financial instruments, French savings is not directed enough towards firms, especially SMEs. It is important therefore to improve the legal and regulatory environment to reduce all these obstacles and to induce behaviours changes.
How can we understand what is going on in the way SMEs are financed in Europe and more precisely in France? Polls tell us that everything works smoothly, but those polls are made by banks and credit hardly grows and companies do complain, especially if they are young and tiny. Many reasons can account for this situation: Basel regulation, European regulation and Banking union, competition among banks concur to make credit more complex, with tighter margins. And, by the same time, securitization and disintermediation do grow. This evolution is both permitted by new technologies, looked after by investors (in asset management and insurance companies), promoted by regulators and central bankers and finally favoured by bankers themselves. So this new channel should grow, with a higher interest rate we must admit, and we all have to be prepared to it.
As France and most European economies experience an indecisive recover early in 2014, questions arise about what will pull tomorrow’s growth. More than ever, competitiveness, innovation and international strategies of firms have been identified as the main issues to avoid the decline of potential growth, involving a quick recovery of investment expenditures. This implies the availability of a continuum of financing for French SMEs so that they can grow and gain the critical size to carry tomorrow’s competitiveness, in a context where their profit margins are at low levels. Since the beginning of the crisis, financing conditions, especially banking conditions, have not appeared to be too restricting for French SMEs. But remaining persistent market failures still need to be addressed to avoid the economic recovery being hampered. There lies the role of Bpifrance, by driving private actors of financing, to ensure SMEs that they will get sufficient resources to carry on their innovative, international and growth strategies.
Despite a decrease of the profitability of some firms (especially industrial firms), French SMEs have maintained a relatively high investment rate over the last fifteen years leading to growing indebtedness. This was kept under control thanks to the decrease of the cost of debt whereas along with a relatively healthy financial position maintained through retained cash flows that allows a decrease in leverage. Nevertheless, despite this apparent dynamism, the SMEs investment is rather lacklustre, suggesting a lack of successful innovative investment projects, even before the crisis. When considering the nature of the investment, we note that the dynamism of investment could primarily reflect an increase in building, mainly reflecting a price effect. There are also indications that investment is been more passive than offensive and insufficiently productive, at least in the manufacturing sector. The increase of the both components of their balance sheet reveals the vulnerability of French firms and questions the sustainability of the recent developments.
SMEs of critical size (between 10 and 150 employees) are key to the French growth dynamic. They represent more than one third of total value added and employment. It turns out that those large SMEs are over represented in total corporate insolvencies. Their numbers doubled compared to pre-crisis level and has not diminished yet. On the one hand, the weakening of private consumption pace weighs on companies often focused on domestic markets. On the other hand, the deterioration of their financial situation increases their vulnerability. Finally, the importance of supplier debt and “hidden” payment delays are major constraints. For example, SMEs in the construction sector are often squeezed between large companies, on the client side and on the supplier side. Clients pay late and suppliers ask for quick payments. A protection of receivables seems important while credit insurance is underused by SMEs. Those companies acknowledge sometimes too late the risk associated with claims from clients. A simplified credit insurance offer, for SMEs is therefore a useful instrument, amongst others, favouring risk prevention.
Within the context of the financial crisis followed by the European sovereign debt crisis, outstanding loans to non-financial companies in the euro area have been on a downward trend since 2006. However, France has been resisting over the recent period, especially SMEs, which report a slight increase of their outstanding loans. Academic studies and business surveys conducted by the Banque de France and ECB show that SMEs do not seem to be affected by credit rationing: outstanding loans and interest rates charged did not worsened for SMEs in France. This observation holds for investment loans, and to a lesser extent, for cash credit. French SMEs seem more concerned by a profitability constraint than a financing constraint: the two most pressing problems mentioned by French SMEs are finding customers and costs of production. In the prospect of the strengthening of the economic upturn, the Banque de France supports the initiatives aimed at reinforcing the possibility for credit establishments to diversify and consolidate their potential financing offers to SMEs.
The 2008 financial crisis and hardened regulatory requirements have resulted in a more restrictive credit offering to small and middle-size enterprises (SMEs). To finance their growth, SMEs must thus find alternative financing sources. Bonds issuance may appear as a promising solution. However, this market is only accessible to large companies, be it on the national or on the international market. The objective of this article is to stress the conditions that will enable SMEs to get access to direct fixed income market financing. The results evidence a strong development of this market since 2010. However, two conditions are required for this market to attain the scale it deserves: the low financings needed by SMEs must be mutualized and their risk adequately assessed.
This article is motivated by the strong increase of the bonds offerings of small and medium (SME) German firms observed between 2008 and 2012. These bonds are in particular characterized by their high nominal rates compared to bank credit. The economic and financial characteristics of these issuers suggest that they might be more financially constrained than comparable non-issuers. Moreover, this effect is stronger when issuers use the offering’s proceeds to refinance existing debt, suggesting that some firms decide to issue bonds because they have lost access to bank credit. This leads to consider the risk of these bonds. An analysis of the yields indeed clearly shows that this market has a highly, but limited, speculative segment.
Alternext was set up in 2005 and was intended to help small and medium enterprises (SMEs) finance their development. Using a sample of SMEs that went public on Alternext during the period 2005-2009, the aim of this article is threefold: firstly, it sheds a light on the operational and financial performances of these firms before and after the initial public offering; secondly, it gives evidence of a short term undervaluation and a long term underperformance over a 3-year period after the IPO. Finally, it assesses the activity on the primary market of Alternext from the date of the IPO until the 3rd anniversary.
The Alternative Investment Market (AIM), a stock market dedicated to small and medium capitalizations, has been created in 1995 by the London Stock Exchange (LSE). The AIM is viewed nowadays as a model for numerous stock markets with a similar target. It relies on a specific market model, where private intermediaries, the Nomads, replace, to a certain extent, the LSE regulation. This paper investigates on the nature of the AIM success. We shed light on the strengths and the weaknesses, through a review of the empirical literature. On the one hand, the AIM is characterized by a high rate of new IPOs, seasoned offerings, and voluntary exits. On the other hand, the operational performances of the AIM-listed companies appear to be lower than those for similar firms on other stock markets, thereby casting doubts on the role of AIM as a stepping stone for innovative firms. The conclusions of the article offer some insights for policy-makers considering the creation of new junior markets.
As a stock exchange dedicated to small and medium enterprises (SMEs), the success of the Alternative Investment Market (AIM) has established this segment of the London Stock Exchange as the benchmark, of which the Alternext is considered a flawed copy. This article aims to invalidate this proposition. First, the performance of Alternext (2005-2012), if compared to AIM’s performance at the same stage of development, is not as bad as critiques have been deluded the public into believing. Second, AIM characteristics are not set up as a stock exchange model dedicated to medium and small enterprises: the success seems to be based less on the services which AIM provides to small or innovative companies than on the regulatory arbitrage realized by medium and large companies. This observation acutely raises the question of the nature and organization of a stock exchange adapted to the specifications of SMEs.
The debt capital of real economy enterprises in Germany is provided to a large extent by the banking system via credits, in particular to SMEs. This predominance of the bank-based financing is due to a small and medium-sized businesses structure of the real economy and to a structure of the banking market mostly oriented towards deposits-based lending to enterprises and available all over the country, including rural areas.
In the course of the internationalisation of the regulation standards, there is the threat of a distortion in favour of the capital market-oriented financial system. The European policy should, therefore, take care that the regulation regime will not urge the financial system into an excessive capital market orientation. Considerations by the EU Commission to establish financial instruments outside the banking sector cannot do justice to the problem of asymmetrical information prevailing on the credit and capital markets and hence not guarantee stable corporate financing. However, economic policy is called upon to more intensely put instruments of venture capital financing into the focus of the public funding institutions and their financial promotional programmes.
As soon as the first version of the Basel III’s agreements was published in December 2010, the French Banking Federation brought to the attention of the authorities the multiple and negative potential consequences of the capital and liquidity (LCR and NSFR) requirements’ strengthening on the SME’s financing. The European regulation named CRR adapting Basel III rules in Europe, which provides for a stable capital requirement for credit risk on exposures to SMEs compared to previous rules, in contradiction with the basic agreement, has not penalized the financing of the SMEs since its coming into force on January first, 2014. Indeed, the decrease of 7.4 % in corporate lending at the level of the Eurozone is due only to the cutbacks in Spain and in Italy, affected by the sovereign debt crisis.
On the other hand, we consider that the implementation of the LCR ratio might have a negative impact if not correctly calibrated by the European Commission in its delegated act due to be published before June 30, 2014. It drives banks to pursue their plea for an extension of liquid assets, for the recognition of Restricted Committed Liquidity Facilities granted by central banks and the recognition of Asset backed Securities as liquid assets. Furthermore today they are adapting their model of refinancing as shown by the recent set-up of a securitization company by five big French banks last April.
Governments and banks have been arguing for years on SMEs financing. SMEs in Europe are at the heart of the economy and are mainly financed by banks. The numerous regulatory measures taken in the last years have deeply impacted financing, in general, and, SME in particular.
Given the SMEs needs, some alternative sources of financing are newly emerging such as the Euro PP, a renewed interest for securitization, the creation of specific UCITS towards insurers and the recent crowdfunding mechanisms. Their variety and specific set ups call for tailored risks approaches and market conditions to assure growth. Nonetheless, their market shares will increase slowly over time, substituting only a part of the bank financing.
These alternative financing vehicles imply strong changes inside the bank retail networks and within the asset management arm of the insurers.
As the liquidity crisis reached its fever pitch in 2009, twenty-four large corporations from seven countries actively worked on a consortium bank project – particularly efficient in rough weather – aiming at diversifying their funding sources and their ecosystem’s ones. They wished to extend the eligibility to this institution to smaller companies, and have been working to get access to various programs of the European Investment Bank and European Investment Fund. Beside a simple business purpose (granting medium-term credit facilities to its sole shareholders), this bank would rely on original mechanisms preserving its solvency at any circumstances and on an asset-liability management policy matching the duration of its resources and commitments (and vice versa). Asset managers, a leading rating agency and public authorities acknowledged the potential efficiency and resilience of such a business model. With credit at historically low prices, most of the corporate sponsors decided to put the project on hold; yet the current lull should be the most favourable time to set up tools to face the next liquidity crisis.
Since the late sixties the European Investment Bank (EIB) has been involved in financing SMEs in Europe, through bank intermediation. This policy has been extensively deployed over the years and was to become one of the Bank’s top priorities (EUR 22bn in 2013). As the bank of the European Union, the EIB has been developing this policy by operating in each EU country as a force for cohesion, for transferring experience and for solidarity. Thus, in 2013 the Bank was able to provide Greek SMEs with EUR 1.5bn and is financing their current exports to the tune of EUR 500 m. Similar mechanisms have been deployed, mutatis mutandis, in Ireland, Portugal and Spain.
In countries that were not so badly affected by the crisis, the EIB and its subsidiary the EIF have been working in close cooperation with 370 banks and 481 investment funds in Europe. In 2013, more than EUR 1.8bn was intermediated in favour of French SMEs to reduce market failures by providing long-term EIB finance, or through EIF equity participations, microfinance or guarantees. These EU resources have been used by some 150,000 SME investments totaling EUR 5.6bn.