Corporate financing – lessons learned for large corporates from the COVID-19 pandemic
The COVID-19 pandemic’s economic consequences are among the biggest shocks that German companies, their employees, and society at large have faced for decades. Nevertheless, the government, the European Union (EU), the European Central Bank (ECB), companies themselves, and (last but not least) the banks have managed in a concerted effort to significantly limit the damage. However, the pandemic has confronted companies with particular challenges – depending on their sector and the phase of the pandemic – sometimes even leading to an existential crisis.
According to the very specific challenges faced during different phases of the pandemic, three sector groups can basically be distinguished:
- Negatively impacted sectors: this group mostly includes companies from the fields of aviation, tourism, entertainment, food services and retail, which had to close during the lockdown.
- Temporarily or indirectly impacted sectors: examples of this group are car manufacturers and their suppliers, the manufacturing industry where demand collapsed at the outbreak of the pandemic, and various areas of logistics where revenues initially slumped as well.
- Positively or hardly impacted sectors: among the winners of the pandemic are certainly pharmaceutical companies as well as e-commerce. Telecommunications have also generally proven resilient.
Safeguarding liquidity – challenges at the outset of the pandemic
During the first wave of the COVID-19 pandemic, safeguarding liquidity was certainly the most urgent task for affected companies. “Banks played an important role in safeguarding liquidity in both the immediate and medium term during times of great uncertainty,” Michael Kilka, Regional Board Member, Global Sectors & German MNC at Commerzbank, explained. The main issues were as follows:
- Structuring and coordinating funding programmes with other banks and/or public support measures, especially those where KfW (Kreditanstalt für Wiederaufbau – Germany’s largest development bank) was involved. Here, Commerzbank acted as key advisor and structurer of loan programmes.
- Providing customised credit lines for corporate clients. Commerzbank responded to the crisis by increasing credit lines, in some cases significantly.
Mr Kilka commented: “In the acute phase of the first wave, the corporate client business also underwent repricing. Even in the low interest environment, clients were suddenly faced with higher risk premiums, meaning: money costs money again.” High uncertainty also meant that available maturities were significantly reduced.
Notable differences between sectors – challenges in the further course of the pandemic
The first wave of the pandemic was followed by a phase of relief, further followed by other waves in winter. These phases once again showed a differentiated, sector-specific picture.
Strongly affected companies in critical sectors have had to (and will still have to) concentrate on covering their financial requirements and advancing their strategic transformation until the pandemic is over, with a particular focus on cost management and, if needed, adjustments to the business model. “Commerzbank assists its clients in difficult situations, especially when it comes to raising funds and adjusting capital structures,” Michael Kilka said.
For temporarily affected major companies from sectors with a positive business outlook, the situation has largely normalised in the further course of the pandemic; they used this opportunity, for example, to obtain long-term bridge liquidity on the capital markets. Further relief was provided when loan rates normalised after peaks in the first weeks of the pandemic, and longer maturities were once again available for companies with good credit quality. Mr Kilka said: “In this phase of the pandemic, our clients benefited from Commerzbank’s good access to the capital market, issuing bonds through us or syndicated loans, for example.” Companies from hardly or positively affected sectors have generally continued to pursue their internal or external growth strategies. According to Mr Kilka, Commerzbank supports its clients also in these processes, either through funding of external acquisitions or major investments in long-term assets.
This time, banks have been part of the solution, not part of the problem
The COVID-19 pandemic has required substantial efforts, from companies, whether big or small, from the public sector, and – let it not be forgotten – from the banks. Overall, the banking system, which had been strengthened through various regulations since 2008, has weathered the crisis well. Politicians have praised the banks on various occasions, saying that they have been part of the solution this time, and not part of the problem, as they had been during the financial crisis. Aspects to be highlighted are:
- The interaction between the different players of the financial system, including commercial banks, governments, development banks, and central banks. In this highly critical situation, the system has proven effective and delivered on its various functions. A collapse of the system was thereby avoided; the real economy was largely able to be supported through system-wide cooperation. The capital markets as well have proven very resilient and contributed to normalisation.
- A resilient core banking group – the traditional principal banks – constituted another factor for success. Long-standing and stable client relationships between banks and companies have paid off throughout the crisis. In many cases, these relationships have been strengthened even further during the pandemic. “We have been able to support our clients very effectively during the crisis – after all, we know their businesses and the corresponding requirements very well due to our close client relationships and our thorough understanding of sectors,” Michael Kilka explained.
Well protected – establishing a core banking group before the crisis
In the following interview, Michael Kilka (Regional Board Member, Global Sectors & German MNC) explains how major companies can better prepare for future crises such as the coronavirus pandemic.
First wave, second, third …: could the ongoing coronavirus pandemic be the last straw for some companies?
Michael Kilka:There isn’t really an all-encompassing answer to that. The situation is highly sector-specific. Companies which weathered the first waves well will probably still be fine, whereas those companies facing sector- or company-specific issues right from the start will probably still have a hard time, since obtaining liquidity is not getting any easier for this group of affected enterprises. Nonetheless: cooperation between the European Central Bank (ECB), the policymakers and the banks has worked very well. But of course in the end we are gazing into a crystal ball, because the pandemic keeps showing us a new face.
How can companies prepare even better for an extreme situation such as the pandemic?
First and foremost, companies should establish a complete sequence of preparatory measures, the first being the execution of scenario calculations, assessing the potential impact for them individually: how would the event influence cash flow? Secondly, the cost situation: it is a truism that declining income must be accompanied by reduced expenses. Last but not least, the financing mix has to be right, i.e. as broad and flexible as possible, allowing the company to retain capacity to act in critical situations. As an example, it may be advisable to maintain certain provisions even if it costs money. Major players should also maintain access to capital markets, for example by preparing and upholding external ratings. To sum it up: the optimum preparation for potential crises such as the pandemic depends on the sector the company is in and on its own situation; what holds true on a general level, however, is that a good, reliable banking relationship can offer a lot of support.
Will COVID-19 remain a singular event, or is Commerzbank expecting such extreme events to occur more often in future – whether virus-related or due to the consequences of climate change?
Singular events like a pandemic are unpredictable. However, any correct preparation must generally price in such a scenario. The impact of climate change can be statistically proven and thus is another matter. A company’s sustainability strategy should take that into account. If necessary, the business model might need to be adjusted.
What can banks do to prepare their clients for future crises in the best way possible?
Commerzbank covers a broad spectrum, beginning with advisory services, explaining how to set up a crisis-resilient company. We can also deliver the corresponding products, ranging from more flexible credit lines via support during the rating process to capital markets access. All of this can be prepared prior to a crisis. And when the crisis then hits home, we – as a member of the core banking group – are ready and able to provide specific assistance. Commerzbank has proven that – especially in the past 18 months.
You addressed the cost topic. Where can companies place the lever during a crisis?
Once again, that is a very sector-specific issue. One possible option is shutting down partial capacities, of which airlines – with their reduced aircraft fleets during the coronavirus pandemic – are a good example. However, reducing capacities can also mean sending employees home or into short-time work, therefore lowering personnel expenses. These are just two of the manifold possibilities on the cost side.
You highlighted the importance of a core banking group for companies. What are the criteria for choosing a core banking group?
A company should aim to set up a reliable banking group that also provides support during difficult phases. The banking group must be able to offer the entire range of necessary products; one could add a few specialist institutions to round off the support. The size and structure of a core banking group also depends on the company’s own size. What matters is that both parties can build a trusting relationship over a longer period of time.
Source: Commerzbank AG, September 2021