No credit crunch expected by Swiss economy
Large degree of consistency between bank and business plans / Significant hopes that the crisis will soon end / Companies anticipate new loans will involve worse conditions and higher requirements
ZURICH, DECEMBER 22, 2009 – The vast majority of Swiss banks and companies are expecting a slow recovery for the economy and consider it unlikely that there will be a credit crunch within the next twelve months. However, widespread financing shortages cannot be ruled out for individual sectors, such as engineering, automotive suppliers and construction. Among the managers of 30 banks and 140 companies surveyed, there is considerable agreement that credit conditions will worsen and the requirements for arranging loans will become more stringent. These are the main findings of the study entitled “Will financing cause the upswing to fail?” conducted by the audit and advisory services firm Ernst & Young.
Credit lines not exhausted
“There are good indications that there really will be no credit crunch in Switzerland”, states Stephan Haagmans, Partner and Head of Transaction Advisory Services for Financial Services. “The credit demand forecast by companies seems to tally with the banks’ supply planning.”
Around 53% of banks expect a rise in credit demand over the next 12 months. This is as compared with plans expressed by companies, 40% of which want to increase their demand for credit. However, a fair proportion of this rise in demand seems to be generated by a proactive policy to secure the supply of liquidity, although only one in four Swiss companies plans to increase its investments over the next year.
Thus the current situation seems to be continuing. “The credit supply available to the Swiss economy looks relatively good,” states Stephan Haagmans. The major banks have even seen a slight fall in credit demand from domestic companies, whereas the cantonal banks report a slight rise. While the Swiss National Bank assumes that GDP will fall by around 1.5% for 2009 as a whole, the majority of banks and companies are in confident mood for 2010: 74% of banks and 78% of companies are expecting the first signs of the upswing within the next 18 months.
Swiss banks take a more positive view of their refinancing options than their German-speaking neighbors, for example. Worsening conditions are expected by a minority, with 20 to 35% of banks overwhelmingly anticipating improvements, depending on the type of refinancing. Two thirds to three quarters of institutions consider that there will be no change.
Companies anticipate worse conditions and more stringent requirements for new loans
Despite all the optimism, a significant proportion of companies and a slightly less significant number of banks expect worse conditions and more stringent requirements to be imposed on new loan arrangements in the near future. Higher ancillary costs, shorter terms, shortened credit lines, higher documentation and collateral requirements and stricter conditions (contractual covenants, such as duties of notification in the event that certain performance ratios are not met) are expected by at least half of companies. This development does not feature as highly in the banks’ expectations, but a large number of the banks and companies surveyed are in agreement that it will become more difficult over the next 12 months to extend expiring credit agreements. “Hardly any agreements will make it through to the next round without major changes. Companies should prepare carefully for upcoming extension negotiations,” recommends Peter Dauwalder, Partner and Head of Corporate Restructuring.
Alternative financing options gaining ground slowly
A good 33% of the companies surveyed were considering the question of whether alternative financing instruments should be employed. Few routes to alternative third-party financing were perceived, however. The bond market, which offers innovative forms such as hybrid financing instruments or convertible bonds, is only open to a small number of companies of sufficient size and coverage by rating agencies. Correspondingly, often the only alternatives to traditional credit financing are leasing or factoring, but these asset-oriented forms of financing often come at a high price and thus do not represent a true alternative.
There are also few opportunities for change in respect of financing for large investment volumes. 60% of banks and 49% of companies believe that large-scale projects will continue to be financed by means of long-term bank loans. In the banks’ opinion, however, such risks will be shared more widely than before between more parties. 52% of banks assume that large investments will be increasingly financed by banking consortia in the future, whereas 50% of companies are backing higher equity ratios.
In order to improve their prospects of arranging new loans despite the increasing difficulties, many companies are prepared to make internal improvements. 34% want to improve their corporate planning and controls, 27% their liquidity management, and 26% their rating, while 21% of companies want to improve their financing structure. “29% of companies aiming for a higher equity ratio seems ambitious in the current situation,” qualifies Peter Dauwalder. “And it is incredible that 40% see no need for any action at all.” Still, the banks can be reassured by the fact that only two percent plan to change their financial institution.
Summary
The majority of the banks and companies surveyed are of the opinion that there will be no large-scale credit crunch in Switzerland. However, it is not possible to rule out the likelihood of some sectors being confronted with financing shortages over the next 12 months. In view of the lack of third-party financing alternatives, the companies surveyed are primarily intending to take steps to free up liquidity within their organizations.
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