Companies do not fully feel the effects of interest rate hikes until after five quarters

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5 quarters. That’s the time it will likely take for the interest rate hikes by the U.S. Federal Reserve to fully impact the interest expenses of companies, according to a new study by the Federal Reserve Bank of Boston (see the study in English here). This is the reason why, after a year and a half of implementing anti-inflationary measures, only now are companies starting to experience an increase in the financial cost of their debt.

The graph shows the historical evolution of the interest rate of the American Federal Reserve (light blue line) and the non-immediate effect on the financial cost for companies (red line).

This delayed effect of restrictive monetary policies is also likely to be seen in the European realm. Since March 2022, both the U.S. Federal Reserve (the Fed) and the European Central Bank (ECB) began raising reference rates in an effort to curb inflation. Since then, the Fed has raised its rate from nearly zero to 5.25%, and the ECB has raised its main reference rate to 4.5% following the recent 0.25% increase on September 14th.

When central banks raise their interest rates, companies must pay higher rates on any variable interest debt they have, and on any debt they refinance. This leads to the need to offset this increased cost by reducing expenses and, in severe cases, by containing wages or laying off some of their employees. The rising cost of debt can also cause treasury difficulties and loan defaults.

The researchers of the mentioned study state that “regarding the current cycle, this finding suggests that most of the interest rate hikes have not yet been fully transferred to companies’ interest expenses.” They add that “it’s possible that the initial rate hike of 0.25 percentage points in March 2022 has fully impacted the interest expense ratio of companies, but they have not yet felt the full impact of the subsequent 5 percentage point hikes.” This contrasts with other parts of the economy, such as the real estate market and the banking system, where the high interest rates have already had an impact.

For companies, it is time to prepare for this rate hike which, in a deferred manner, will have an impact on their operating accounts and their treasury in the coming months. As always, Altria Corpo will be there to assist these companies in finding the best financial solution for these situations.

Altria Corpo’s paper on direct lending published in the prestigious ODF

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Altria Corpo’s partners, Albert Gumà and Ramiro Lama, and its Managing Director Eloi Noya, have prepared a working paper on direct lending that has been published by the Observatory of Financial Disclosure (ODF) of the prestigious Institute of Financial Studies (IEF).

Source: Marquette & Associates

Please find attached the link to this document: https://www.iefweb.org/es/publicacion-odf/el-direct-lending-una-alternativa-creciente-en-la-financiacion-a-empresas/

In this report, the authors reflect on the phenomenon of direct lending, which emerged in the second decade of the 21st century as one of the new forms of alternative financing to traditional banking and those provided by the capital markets. Among these alternative instruments, private debt funds stand out, aimed at financing business projects of various kinds. One of the most relevant subsets of this category of private debt is direct lending, which emerged after the Great Financial Crisis of 2008.

Through direct lending, the segment of small and medium-sized enterprises, which has always been highly dependent on bank financing, now has an alternative when it comes to financing the various needs it may have, such as organic growth, the acquisition of other companies or the restructuring of its debt maturities. Direct lending is also interesting from an investment point of view, as it makes available an asset class such as corporate loans. This new asset class has a higher return than similar markets such as bond markets, for example, although certain disadvantages such as lower liquidity or the usual lack of credit ratings must also be taken into account.

In short, this document describes the main characteristics of direct lending as a form of financing, which in turn constitutes an interesting alternative for investors. It aims to analyse in some detail the advantages and disadvantages of direct lending, the critical factors to be taken into account, as well as the economic, regulatory and sustainable policy framework in which this activity is being developed in Europe.

More Next Generation: an additional 22.5 billion in financing for companies through ICO credit lines

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Spanish Government approved the extension of the Recovery Plan this week. The European Next Generation programme will support 84,000 loans included in this addendum, as well as 7.7 billion in transfers and 2.2 billion from the REPowerEU mechanism. Among the programmes to which these resources will be allocated is the Official Credit Institute (ICO), which will mobilise 4 billion in relation to the promotion of social rental housing and whose loans will be subject to an interest rate of 4%.

Vice-president Nadia Calviño announced that the ICO and other banking institutions will have 22.5 billion to deploy lines of financing to entrepreneurs, companies, green projects and especially in the tourism sector. The loans will create funds to finance technology start-ups and the Spanish audiovisual sector. These loans will also reinforce the structural funds, creating a security cushion of 3 billion “to give credibility to entrepreneurs and employees in the event of an economic setback” according to the Ministry of Economy.

In addition, the regional governments will receive funds for sustainable investment from the European Investment Bank (EIB). The EIB will be responsible for distributing these funds according to the financial viability of the plans submitted by the regional governments to obtain financing.

The extension of the Recovery Plan will also mobilise 28.3 billion to reinforce 12 Perte projects, including the Chip and ERHA Perte – aimed at deploying renewable energy – and the Water Cycle Digitalisation Perte. It is expected to include 18 reforms that will complement the existing ones in terms of energy and correction of the distortion in the supply-demand ratio of the labour market.

Undoubtedly, good news for Spanish companies that have new financing instruments. At Altria Corpo we advise on these and other financial solutions, both banking and alternative.

Medium-sized enterprises, as necessary as they are scarce

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The Spanish economy is based on SMEs. Not only do they represent 99.8% of the total number of companies, but also 62% of Gross Value Added (GVA) and 66% of total business employment. However, one of the drawbacks for economic growth in our country is the low percentage of medium-sized companies and an excessive concentration of companies that are too small in size.

In Spain, there are fewer than 20,000 medium-sized companies, considering in this segment those with between 51 and 250 employees. If we add as a criterion those with a turnover of more than 50 million euros, the figure drops to only 3,300, and if we exclude those that are not foreign subsidiaries, the total does not exceed 1,800.

There is a direct relationship between the size of companies and the development of a country’s economy, since an increase in volume favours investment in innovation and therefore productivity, which impacts, among other aspects, on better jobs and real wages. Larger size also correlates with higher survival rates in times of economic crisis. In terms of financing, size undoubtedly also matters, since, in addition to better risk assessment by traditional banks, there is also greater availability of alternative financing, with many financial providers dedicated to this segment. Thus, we can count on direct lending funds for these medium-sized companies with the possibility of loans from one million euros and great flexibility in their repayment, and a wide variety of possibilities depending on the need, economic sector and guarantees provided. Having a financial advisor such as Altria Corpo will help to obtain the best alternative according to each circumstance.

57% of companies will look for alternative financing in 2023, according to the Altria Corpo and IEF Barometer

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Altria Corpo and the Instituto de Estudios Financieros (IEF) have published in February 2023 the results of the third edition of the Fintech and Alternative Finance Business Barometer. This Barometer collects on an annual basis the opinions, personal experience and expectations of companies and corporate finance providers (bank and alternative) about credit granting policies, and in particular the knowledge and use of fintech and alternative finance by companies. A total of 138 companies, 39 alternative financiers and 14 banks responded this time to the questionnaire, which has already become a benchmark in the sector.

Among the most significant results of the Barometer is the perception that access to bank credit has been difficult in 2022 and will continue to be difficult in 2023. Only 18% of the companies surveyed had found access to credit easy or very easy. In the face of this difficulty, companies are moderately optimistic about the role of alternative financing to at least partially cover this shortage of bank credit.

In a context of high inflation and a possible economic recession, financial agents, both banks and alternative financiers, believe that they will further tighten their lending policies and are quite likely to raise interest rates on corporate financing.

The Barometer also polls knowledge and use of Fintech and alternative finance. In this regard, there is a growth in awareness of non-bank financing alternatives, with more than 75% of companies able to mention an alternative finance provider and 56% having used their services.

As in last year’s Barometer, as many as 57% of companies say they will be looking for non-bank sources of finance in 2023. For all these companies and those that are not yet aware of alternative financing or simply need expert advice on financing issues, Altria Corpo will be there to help them find the best solution for each business situation.

See the main results of the Barometer: