Availability of credit still top of corporate Ireland’s agenda……

Penned by John Finn, Managing Director, Treasury Solutions Ltd

So as we face into the end of another year and push past the third anniversary of the first hedge fund/sub-prime crisis, will it be another winter of discontent or are there prospects of some shoots of recovery in Spring?

The key issue facing corporates continues to be the availability of credit. Since last year’s conference NAMA is up and running but three institutions (BOSI, Anglo and INBS) have already indicated their phased withdrawal from the market. The failure to reposition Anglo as a (business) lending bank means that the primary “beneficiary” (and catalyst?) of NAMA will not partake in the sole reason for NAMA i.e. the provision of extra credit. The withdrawal of BOSI means that a second provider of funding to the mid corporate market will not be part of any economic revival here.

So what does it mean for the credit prospects of various sections of Corporate Ireland?
At the upper end of the scale, many of the largest companies have already benefitted from their ability to tap non-bank markets for funding (mainly the US Private Placement market) giving them both longevity in their facilities and a strategic move away from banking market dependency. However, part of this has and will continue to be driven by the reduction in the size of the Irish syndications market. Those who haven’t diversified away from the banking market may find themselves having to hit the UK banking market as they fail to refinance solely in the Irish market. The extent to which the “paddy factor” is a negative remains to be seen but will be a less obvious but most definite cost to borrowers and the economy of less than impressive management of the banking crisis as perceived by international lenders.

Mid-sized corporates are possibly best insulated to date as they don’t need to tap foreign bank/non-bank markets for funding and are big enough to be able to negotiate with banks here.

SMEs remain the most vulnerable sector as the attrition rate tends to be higher in recessions making lending decisions to this sector more difficult from a banking perspective but they also have the least leverage in negotiations. Overdrafts have been reduced both explicitly and by stealth. The implementation of the plan to force AIB and Bank of Ireland to lend an extra €12bn is awaited with bated breath.

What could help? The establishment of a Euro Private Placement market would be a welcome development as would be the reduction in minimum (cost-effective) deal size in the US PP market (currently estimated to be $100m). Given the rapid increase in the Irish savings ratio, some sort of mechanism to encourage the placing of such funds in new portfolios which are used to fund Irish companies would be useful. A bit of lateral thinking would be most welcome.

2011 hopefully will see NAMA with all of its loans, the 2 major Irish banks with clean balance sheets and lending new money at a faster rate and the non-Irish banks continuing to grow their activities. Finally we hope that there are no further market exits as borrowers need some level of competition and that Basel III does not drive margins up/lending back down.

These issues and more to be discussed further at the upcoming Corporate Treasury & Cash Management conference.