It is not just the UK population that, in a phrase coined by opposition leader Ed Miliband, has a “squeezed middle”. According to rating agency Standard & Poor’s (S&P), Europe’s corporate sector has one too.
Identifying a funding gap of €3.5 trillion for medium-sized organizations over the next five years, Alexandra Dimitrijevic, managing director at the agency, says that: “While larger corporates have access to finance and much smaller companies are the focus of a variety of policy proposals, medium-sized businesses or the ‘squeezed middle’ appear to be falling into the gap between them.”
S&P’s solution to the problem is, not surprisingly, a quasi-rating to increase transparency and comparability of mid-sized companies for potential investors.
This Mid-Market Evaluation (MME) will be targeted at firms with revenues below €1.5 billion and debt below €500 million. It is aimed at Europe’s €20 billion private placement market, €16 billion of which is accounted for by German Schuldschein.
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| Roberto Rivero, head of market development EMEA at S&P |
“Roughly one year ago, press coverage around SMEs and contact with the market put this onto our radar,” Roberto Rivero, head of market development EMEA at S&P, tells Euromoney. “We undertook research and met with 250 organizations, many of which were mid-sized companies that were having problems raising money – facilities were being withdrawn and being repriced.”
Rivero stresses that the new MME is not a rating but is an independent opinion on the creditworthiness of mid-market non-financial companies. This will be ranked from MM1 (highest) to MMD (default). The aim is to facilitate greater issuance in the non-US private placement markets.
“Last year, 40% of issuers in the US private placement market came from Europe, which illustrates the issues that European companies are having raising money in their home markets,” says Rivero.
“The success of the German Schuldschein market is in sharp contrast to rest of the region. Many things could help the development of a private placement market in Europe – the biggest barrier is probably the investment rules for insurance companies but another is the lack of information, and transparency, which is also a huge problem.”
This move compliments initiatives by trade bodies in the UK and France to stimulate domestic private placement issuance.
“Large companies have been raising significant amounts of new funding in the international bond markets but this has been more difficult for mid-sized companies where smaller issue sizes and lack of clarity on credit risk have discouraged investors,” says Colin Tyler, chief executive of the Association of Corporate Treasurers.
“Standard & Poor’s new mid-market evaluation is therefore a welcome development and one which should stimulate mid-market issuance across Europe.”
Whether or not a “rating-lite” evaluation such as the MME can be applied to such a disparate range of corporates in very different legal and business environments remains to be seen, but any effort to stimulate alternative sources of finance to corporates starved of bank credit should be welcomed.
“We are leaning on the expertise we have gained by rating over 1,000 corporates in Europe and the analysis on loans in the CLO market,” says Rivero. “We have taken our corporate rating methodology and tried to simplify it to cater for the size and liquidity in the SME sector.”
