The ECB’s decision to cut interest rates in July meant that private-sector credit grew for the first time in three months. Yet the companies attracting investment invariably have some strategic edge over their competitors. Who in Europe is still winning?
Although the €8bn increase in loans extended to non-financial firms is a move in the right direction, it still only represents a 0.1 percent increase on the year. Analysts are speculating that the ECB may cut interest rates again in September to prevent the eurozone falling into recession. Guillaume Menuet, economist at Citi, told Institutional Investor: “The ECB, having cut interest rates a few times already, is not having much luck in trying to offset a significant credit squeeze.”
The EU is taking unilateral measures to stimulate investment in the region, continuing to promote EU bonds, translated into loans for needy EU member states. By far the largest component is the European Financial Stabilisation Mechanism (EFSM), of which €48.5bn of a total €60bn is already promised to Ireland and Portugal. In a presentation to potential investors on August 28, the European Commission reiterated this commitment, stating: “Investors in EU bonds are ultimately exposed to the credit risk of the EU, not to that of the beneficiaries of loans funded.”
Eurozone countries offer their own stimulus packages to potential investors. Germany offers generous research and development rates, which can reach 50 percent of project costs. It allocates an annual budget of €4bn to the grant, which aims particularly to encourage projects in fuel cell development and life sciences. National organisation ‘Germany Trade and Invest’ provides a directory of state development agencies, and supports investors by pre-selecting sites tailored to investment project needs. Up to 20 percent of the project costs are deductible against tax, dependent on its size and start time.
Uptake of these opportunities by SMEs is not difficult to gauge, though their continued success in a difficult economic climate is not assured. Germany has hosted 521 new projects in the past 12 months; Italy just 107. Spain has forced through numerous reforms to reduce structural rigidity and has hosted 256 projects in the past 12 months. Its favourite sectors are biotechnology, where it offers subsidies and public credit for R&D. Its tax credit on research investment can be as high as 30 percent of total annual expenditure on research activities, with €100m of the annual budget. To entice back Spanish companies who have outsourced, it has a special fiscal framework for impatriates of 24 percent, and further generous R&D incentives.
Still, those companies who are proving most successful are those who have enacted their own corporate funding initiatives. Spanish cement company Cementos Portland Valderrivas was almost compelled to sell a part of the company to fund its €1.53bn in bank debt, after a disappointing 2011 loss of €326m. The Spanish real estate sector has hit a brick wall regarding new construction projects; cement consumption has fallen two-thirds since 2007. It negotiated a complicated deal with US group Blackstone. Cementos Portland’s US subsidiary provided the security for a six-year bond, with a 10 percent yield which it sold to Blackstone Group. After six years, Blackstone will also receive a portion of Cementos Portland US’ net returns. By mortgaging its US business, it gained enough cash upfront to pay off its Spanish bank debt to €1.1bn.
In Berlin, automobile company Volkswagen is taking advantage of increased demand for secure alternatives to government bonds, by offering just a 2.375 percent yield on its 10-year bonds. This is an improvement on its 2015 bonds, which gave just 2.125 percent when issued in January. This enables it to undercut its competitors in the price of its cars. It can charge up to eight percent less than its peers Peugeot and Renault. It has now cornered 24 percent of the European market – more than those two combined. Industrial group Thyssenkrupp took the more traditional route of selling assets and introducing shorter working hours, to cut costs in line with a 21 percent drop in orders. It then felt able to forecast a “medium three-digit million euro sum” for fiscal year 2012.