European companies are responding to the economic downturn and a tightening of credit conditions by reducing working capital requirements and scaling back capital outlays for growth, both organic and external.
In the fourth quarter of 2008, Greenwich Associates interviewed more than 1,000 treasurers and finance directors at large companies in Europe about how their companies are being affected by the double whammy of recession and credit crunch and how they are coping with changing conditions. The results reveal that companies took quick action to minimize funding needs as access to essential financing was dramatically curtailed in just the few weeks from the start of October to the end of November.
Research participants were asked to describe changes to their level of access to acquisition finance, structured finance, hedging products and financing for capital expenditures and working capital.
“The share of respondents reporting deteriorating funding conditions increases sharply from October to November in all five areas, illustrating how quickly the events of the fall translated into a sharp tightening of financing within only a two-month span,” says Markus Ohlig, Greenwich Associates consultant.
Hardest hit was funding for acquisitions, structured finance and capex – the categories in which the highest percentage of companies reported deteriorating conditions. Also taking a hit was companies’ access to financing for working capital, followed – to a much lesser extent – by access to hedging products.
Funding constraints first began to affect European companies’ ability to finance external growth. A significant share of companies were reporting reduced availability of acquisition financing as early as the start of October. About a month later, substantial numbers of European companies began experiencing similar disruptions in their ability to secure financing for internal growth in the form of capex.
“It is important to note that, at an aggregate level, our research shows no clear sign that balance sheets have deteriorated over the past year,” says Robert Statius-Muller, Greenwich Associates consultant. “The share of companies’ credit lines that have been drawn down increased marginally, from 35% in the fall of 2007 to 40% in November 2008.”
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D.C.