Duisburg, March 2016. One of Germany’s broadsheet dailies, Frankfurter Allgemeine Zeitung (FAZ), published a special supplement on March 15, 2016, dedicated to SME financing. The following link will take you to the article written by Ulrike Warnecke, Managing Director of PCC SE, which appears in the issue. Title: “Financing at each market phase”.
English translation of the German article Finanzierung für den Mittelstand published by Frankfurter Allgemeine Zeitung (FAZ) in a special supplement on March 15, 2016
Financing at each market phase
As a rule, the possibilities open to a company for financing activities are governed by prevailing market conditions, current business developments and the creditworthiness of the capital-raising entity. Nevertheless, a company’s financial managers still have some scope for action within this framework. The key is to utilise this latitude intelligently. By Ulrike Warnecke
BASIS: A STABLE INVESTOR STRUCTURE
A solid financing basis for capital-raising instruments aligned to the financial market ideally comprises a mix of institutional and private investors. Ensuring that there is a balance between the two donor groups can help ensure the success of the financing undertaking. While private investors tend to maintain their involvement through to instrument maturity, thus providing a stabilising influence on the underlying demand level, institutional investors ensure a necessary degree of liquidity through their interim purchases and sales. Moreover, private investors – when correctly addressed and supported – tend to exhibit a high degree of investment loyalty. This is then reflected in a high level of re-investment whereby private individuals may, on redemption of a bond, re-invest 50 percent or, in some cases, significantly more of their funds in a newly placed or follow-up instrument. A “healthy” investor base for small and medium-sized enterprises (SMEs) can be regarded as comprising one-third institutional and two-thirds private investors.
ESSENTIAL REQUIREMENT: A BALANCE OF INTERESTS
A financing project must be structured so that the interests both of the capital recipient and those of the capital donor are safeguarded. In order to maintain a balance in this regard, research is carried out – for example – into the sentiment and motives of investors. This provides an indication of the requirements that have to be met both for investment instruments to be regarded as attractive and for unhindered market access. The evaluation of publicly accessible market data alone is not sufficient for this; actually talking to investors is indispensable, necessitating extensive contact with financial market participants. The optimized structuring of the financing instruments and continual investor dialog accompanied by better-than-average information dissemination create a basis of trust, facilitating more flexible and more favourable placement activities than is otherwise the norm.
HONESTY: REALISM INSTEAD OF WISHFUL THINKING
However elevated a company’s image of itself may be, it has to provide a realistic view of its performance capabilities without hyperbole. Only in this way is it possible for investors to properly assess the risks – as well as the opportunities – of their commitment with adequate reliability. Credibility in portraying the company to the public in general and to investors specifically is therefore very important. Specifically, “credibility” means presenting a company not just on the basis of its achievements and prospects but also with due and detailed disclosure of any weaknesses and, above all, identifiable business and financial threats. Only a balanced presentation of all the aspects – both positive and negative – will result in the company gaining the reputation it needs within the financial market, thus positively influencing the attractiveness of its shares or bonds. Forecasts that prove to be accurate are also essential for the trust-building process.
CONTINUOUS INFORMATION FLOW: IMPERATIVE
The market must be confident that the capital-raising entity will provide continuous information on the development of its businesses, underpinned by a high degree of transparency to protect investors from unpleasant surprises. There needs to be active communication between the capital acquirer and the capital donor about the company’s business alignment – its strategy – and its current financial situation. Professional financial market participants in particular generally have their own specific ideas on strategy, of which general acceptance and effective implementation within the company are a prerequisite for the granting of funds. Typical communication media for this regular exchange and dialog are annual and quarterly reports, image and company-related brochures or direct contacts with the financial community such as one-on-one investor events or road shows. The latter in particular enable not only the dissemination of detailed and audience-specific information on the company’s development and financial performance, but also effective response to investor feedback.
SUCCESS: CONTINUITY COUNTS
Effective implementation of the measures outlined has a measurable effect on the level of corporate financing available to a company. PCC SE, as a medium-sized investment entity, uses a finance mix of bank loans and project financing within the Group, combined with capital market instruments at the holding level amounting to around € 300 million. Consequently, it is important for the company to constantly have sufficient access to the financial market. Fiscal 2014 represented a challenge as several bankruptcies of companies with outstanding bonds and profit participation certificates unsettled the market in its dealings with capital acquirers from the SME sector. At that time, the placement volume of PCC bonds decreased by around a quarter. However, the concept of the balance of interests, the provision of high-grade information, and a commitment to transparency served to counter the effects of this market turbulence. The volume of placed bonds again increased significantly – by 75 percent – in 2015 compared to that previous period. The risk premiums and thus the coupon interest on the bonds concerned have likewise continuously decreased, from 7.25 percent in 2013 to 5 percent in the second half of 2015.
Ulrike Warnecke is Managing Director of PCC SE