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Tuesday, 16th April 2024
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Corporates favour bank funding to corporate bonds Back  
John Bowe focuses on the major developments in the corporate banking sector in the past year and finds that while funding alternatives available in Ireland have been greatly enhanced in the euro environment, Irish corporates still favour bank funding to the corporate bond market.
In 2000 we saw a further stage in the evolution of the Irish corporate banking landscape. In the same way that we have seen Irish fund managers internationalise their portfolios across euroland, so too has the range and scope of financing alternatives available to Irish corporate borrowers also had an impact on the domestic market. In particular, we have seen the alternatives available to corporates across euroland increasingly becoming available on equivalent terms to Irish corporates.

Pre-euro, the range and scope of Irish pound funding alternatives to domestic corporates was limited. Even in the case of large Irish corporates, funding was typically negotiated on a bilateral or ‘club’ basis rather than as a syndicated transaction. The latter have been more common in the main European markets and will become more the market standard in Ireland for the larger corporate borrowers.

The other clear positive is that, in a euro environment, the range of funding alternatives available has become increasingly diverse. Experience has shown, however, that the corporate bond markets, much heralded prior to euro as the financing tool of the future, have not been accessed to any great extent by Irish companies, who see the availability and flexibility of bank funding as holding greater appeal. This view is supported by anecdotal evidence in the current year where almost all major corporate fundraisings were bank funded. Particularly noteworthy were the more leveraged transactions for Independent News & Media, which raised Eur1 billion associated with the purchase of the Belfast Telegraph, and the recent fundraising by Greencore to finance the bid to acquire to Hazelwood Foods for a similar amount.

These transactions and others also illustrate a greater willingness by corporates to leverage up the balance sheet and minimise the amount of new equity raised, which wou1d be seen as expensive in capital terms and dilutionary from a shareholder perspective.

Based on the evidence of the European market, which has seen massive debt fundraisings in the telecoms sector, greater levels of corporate leverage are now becoming the norm. Perhaps owing to the increased risk associated with leverage, the attitude towards it is still very conservative in Ireland relative to the US. Yet the relatively low and stable euro interest rate environment gives Irish managers greater confidence to assume higher debt levels.

This time last year, much more was expected to occur in the current year in the area of public private partnership (PPP) financing, with power and infrastructure two sectors identified for development. Ultimately little was achieved with the exception of some limited activity on the power side, suggesting that the gestation period of these projects is a lot longer than the optimists would have expected. 2001 is now expected to be the key year for PPP financing.

The buyout of the Clondalkin Group earlier in the year also pointed toward a trend we expected to see a bit more of: going private. Many smaller Irish stocks which see themselves as seriously undervalued by the market have been looking at ways in which they could be taken private, often by the management team supported by the venture funds and institutional equity. Ultimately Adare proved to be the only other case this year although there were efforts to take private a number of the property stocks. The ever-increasing influence of the euro markets will continue to see both international and domestic investment activity focussed around the larger stocks with mid and smaller stocks finding it increasingly difficulty to convince the market of their value. In all there are over 50 small or mid-cap stocks on the Irish exchange and consequently we can expect to see at least two or three buyouts led by management next year with others being acquired.

In the Eurobond markets, issuance from Irish borrowers in the current year has been limited and almost entirely confined to a handful of financial institutions such as Irish Life & Permanent and Bank of Ireland. In large measure this lack of enthusiasm is accounted for by the comparative cost advantage and greater flexibility of bank loans but also because bond issuers are generally well advised to obtain a rating from one of the leading rating agencies such as S&P or Moodys and therefore would have to submit themselves to a detailed level of examination. To date, only four Irish corporates have credit ratings.

Looking ahead it is likely that ongoing structural change within industry sectors, as well as increased shareholder pressure to sustain growth and generate returns, will see greater levels of M&A activity taking place with a growing number of cross-border acquisitions with Irish companies on both on the buying and selling side. Transactions as a consequence will continue to increase in size and, barring a dramatic change in sentiment, be more aggressive and inventive in the manner in which they are funded.

All this points to a gradual shift in borrowing behaviour by Irish corporates.

Ultimately it will move closer to the US model with the bond markets playing at least as important a role in funding corporate debt as bank credit. Other forms of financing will also play an increasingly important role, with US and Euro commercial paper programmes being accessed by the larger companies and securitisation being used more frequently as a funding tool. Currently only the largest Irish companies have sufficient borrowings to make such diversification commercially viable and therefore the growth in scale of corporate Ireland is an important driver of these developments.

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