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BANK TERMS REMAIN TIGHT SO OTHER FINANCING METHODS NOW APPEAL

Financing business expansions

THE ECONOMIC crisis diminished companies’ appetite for expansion and that was subsequently reflected in a reduced demand for external financing through loans or equity. The recovery in Slovakia’s economy has encouraged some companies, which are again beginning to look for financing to execute their business growth plans. Slovakia’s leasing sector reports an upward trend, commercial banks have seen a modest increase in their loans, and other methods of financing are finding their niche in the market, as well.

THE ECONOMIC crisis diminished companies’ appetite for expansion and that was subsequently reflected in a reduced demand for external financing through loans or equity. The recovery in Slovakia’s economy has encouraged some companies, which are again beginning to look for financing to execute their business growth plans. Slovakia’s leasing sector reports an upward trend, commercial banks have seen a modest increase in their loans, and other methods of financing are finding their niche in the market, as well.

According to commercial bankers, demand for loans from businesses remains lower than the bankers had expected at this point in the economic recovery.

“I expected much faster growth of loans,” Igor Vida, director general of Tatra Banka, said at a Financial Management conference held earlier in May, as quoted by the SITA newswire, adding that while banks cannot expect increases in the range of 10 percent this year, this may occur within five years because the potential for economic growth in Slovakia is huge.

The growth in business loans has not reached the pace by which retail loans are increasing, according to Jozef Barta, director general of UniCredit Bank Slovakia, who said firms are thinking over every new investment as well as hiring new staff very carefully because they are not totally sure whether the crisis is over. Other bank representatives shared this opinion at the conference.

Vida believes that the current supply of money in the market exceeds demand and Patrik Mozola, the head of HSBC Bank in Slovakia, said that there are no significant projects which banks are willing to invest in and that is a reason why there is excess money supply.

The interest of businesses in taking bank loans for financing needs increased due to the improving economic situation during the final quarter of 2010, the Finance Ministry and the National Bank of Slovakia (NBS) wrote in a report released in March, but the report also noted that the banks remained cautious in their loan conditions and the growing demand clashed against tightened terms by banks. The SITA newswire further quoted the report as saying that it is thus of little surprise that more general growth in bank loans to companies has not been recorded.

Last year the total volume of bank loans to companies grew by only 0.4 percent according to the report.

During the last two months of 2010 several banks in Slovakia began clearing their loan portfolios of bad loans. They were especially selling failed loans and to a smaller extent writing off failed loans. This trend occurred for loans taken by businesses in most economic sectors but particularly those in transport, the chemical industry, in wholesale and in real estate. Hotels were the business sector with the highest rate of troubled loans but surprisingly this was not where significant loans sales or write-offs of failed loans occurred.

Leasing, another way for businesses to arrange financing for various kinds of equipment, has recorded significant growth thus far in 2011. Companies clustered in the Association of Leasing Companies of Slovakia (ALS) signed new deals worth €399.88 million during the first quarter of 2011, representing a 20-percent increase from the same period of 2010. The number of contracts grew by as much as 12 percent from the previous year. The main driving forces, in line with the leasing industry’s expectations, were new deals for cargo and passenger vehicles, machines and technology.

Discussing the development of the Slovak market in mid February, Juraj Ebringer, president of ALS, said that leasing is a way for businesses to get funding when they do not qualify for a bank loan. Ebringer added that the recent growth in leasing activity confirms that business in Slovakia has revived and that companies are becoming more courageous and optimistic as reflected in an upward trend for leasing – even though actual levels remain below those of the pre-crisis period.

Mezzanine financing



Another way businesses can get financing is called mezzanine financing, a hybrid of debt and equity financing typically used to finance the expansion of existing companies. Mezzanine financing involves a long-term subordinated loan with its total cost and terms of payment dependent mostly on the success of the expansion project.

Mezzanine financing is relatively unused in this region, according to Boris Procik, the head of the board of directors and CEO of RMS Mezzanine, who told The Slovak Spectator last October, that this was the case in Slovakia because there were no specialised institutions dealing with this method of financing.

“During the pre-crisis period banks had expansive goals and business loans were relatively easily accessible,” said Procik. “Thus, there was no need for alternative or supplementary forms of financing. During the crisis banks started to re-assess their loan portfolios and required higher guarantees from their clients, better security, and early settlement of their loans.”

This was the time, according to Procik, when supplementary financing via subordinated debt was welcomed by businesses as well as by banks. But Martin Pardupa, investment director of RMS Mezzanine, explained that mezzanine financing can be used at other times as well, most often when there is a need for development capital, changes in the structure of existing financing, during acquisitions as an additional source of financing, or when there is a need for equity for investments of a project nature, for example with projects co-financed from EU funds.


Topic: Finances and Advisory


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