Why is debt refinancing key to business survival?

Public debt.

The Spanish economy will pick up the pace again before the outbreak of the pandemic in the next 18 months, which is great news, as it means that we can see the light at the end of the tunnel.

However, it is no less true that when we come out of the tunnel we will not be in the same situation as when we entered it, but with a much heavier backpack due to the greater indebtedness of the business sector.

One of the underlying problems of our economy is that our companies show a structural capital deficit and limited access to sources of financing, unlike what happens in the countries around us. This situation makes us especially dependent on what may happen to the funding sources, especially banks.

Corporate sector debt in Spain has grown significantly over the last 12 months. The lower economic activity caused many companies to incur losses and, consequently, they needed to resort to credit to continue their activity. In this sense, the public guarantees were of great importance to allow the credit to continue flowing and the companies to maintain their activity.

So, if everything goes as you expect the Bank of Spain, In the year 2023 our companies will recover their levels of activity, although with a higher level of indebtedness. The consequences derived from this situation will imply a lower availability of resources to continue investing, growing or creating jobs (in short, generating wealth), since they will have to return what they borrowed.

But as “a skinny dog, everything is fleas”, this situation will be aggravated by the bank restructuring process in Spain. The four largest banks account for more than 70% of the market share and all of them are undergoing important transformation processes that involve tens of thousands of layoffs (dressed as voluntary redundancies) as well as new and extremely high costs for their income statement.

Banks need to reduce their credit portfolios and make them more profitable, which, explained in simple language, means that there will be less credit and more expensive.

The banks have increased (and will continue to do so) commissions and interest rates for our companies, while at the same time informing them that they will not renew part of the credit they have had to date.

In the year 2023 our companies will recover their levels of activity

In this scenario, it is not necessary to be very experienced to realize that, if the level of indebtedness has increased, credit has become more expensive and the bank grants less and less financing, alternatives must be sought.

Fortunately, there are numerous investors with a clear mandate to finance companies in Spain. The high degree of banking in our economy had not allowed them to access our business fabric, but the weakness and uncertainty of the sector at the moment has opened the doors for them.

The profile of these financiers, most of them foreigners, is substantially different from that of banks and they offer companies the possibility of obtaining financing over longer terms and without an amortization schedule that is detrimental to the company. Also, in terms of cost, they are also very competitive.

These financiers have become a real, effective and necessary alternative to cover the financing needs of our productive fabric. But without a doubt, the best news of the current unbanking process is that it is no longer just the large companies that can benefit from the benefits of this type of financiers, but also those medium-sized companies with good business models.

In this sense, we must bear in mind that the alternatives currently existing to the Bank financing and that offer extremely advantageous conditions, will be adapted in the future to market conditions. For this reason, we must watch inflationary spikes very carefully, as they could have consequences in the short and medium term.

If these upturns go from being merely circumstantial to becoming structural, all financial markets will be affected. The long-term uncertainty generated by inflation could make the supply of financing products not only more expensive, but also limit access to longer terms.

From my point of view, I do not believe that interest rates are going to rise in the medium term (it would have disastrous consequences), although the increase in credit spreads as a consequence of the existing uncertainties.

For all of the above, and if I had to face the decision of whether or not to refinance my company’s indebtedness, I would undoubtedly apply the rule of “anticipating the difficult by managing the simple”.

It is time to take advantage of the current market situation and guarantee excellent financing conditions for the coming years.

*** Vicente Rodríguez is a partner and director of Structured Financing at Beka Finance

Public debt.