Financing - the traditional financing instrument "bank loan" has become less available to German "Mittelstand"-companies
The market environment for "Mittelstand" companies has increasingly become more challenging. Many standard products are manufactured abroad at a fraction of the costs and for many goods, shipping costs are of decreasing importance. To remain competitive, companies of the German "Mittelstand", especially if their manufacturing is still based in Germany, need to be innovative and need to find and defend niche markets for premium goods and products.
In an international historic comparison, companies of the German "Mittelstand" have proven to use significantly higher relative levels of debt than comparable companies in other European countries
1. In a survey by the "Institut für Mittelstandsforschung" (Institute for research of the "Mittelstand") in Bonn, the industrial "Mittelstand" named bank loans as the most important source of financing after the ability of self-financing through profits.
An important change in the market environment and general framework for the "Mittelstand", in this context, has been and is the drastic change in the German banking landscape, which is characterised by internationalisation and strong competitive pressure.
- In recent years, in which the number of insolvencies in Germany has strongly increased, German banks have experienced significant levels of defaults on loans, which have heavily impacted their balance sheets.
- The transitional arrangement regarding the "Gewährträgerhaftung" - the guarantee, that the federal states and counties will, in case of default, cover all losses of "Landesbanken" and "Sparkassen" (the banks owned by the federal states), ended on 18 July 2005. With the "Gewährträgerhaftung" falling away, the aforementioned "state-owned" banks, traditionally an important partner in the financing of the "Mittelstand", have to refinance themselves at market conditions - without the backing of a quasi state guarantee, which has an impact on the terms and conditions that they can offer to their borrowers.
- The new agreement "Basel II", which had to be implemented by the end of 2006, defines the equity needed by banks for different credit engagements, which will be more dependant on economic risk. As a result, German banks have more widely begun to measure credit risk and, in their pricing, to demand significantly higher spreads for given risks. Going forward, bank loans to private individuals will command a lower risk weighting than bank loans to companies without a credit rating. A lower risk weighting will also apply to small and medium companies (SMEs), if they fulfil certain criteria.
- In many instances, it is particularly large private banks, that shy away from longstanding credit relationships with the more "risky" "Mittelstand"-companies
- For corporate loans, the traditional concept of the "Hausbank" 2 with a longstanding client relationship has become less important
- For credit assessment and pricing of credit risk, banks are increasingly using internal rating tools and methodologies, which require timely and detailed reporting by the borrowers, often difficult to fulfil by the smaller "Mittelstand"-companies
For many, even operationally healthy companies, the access to bank loans and hence to the market for debt has become much more difficult. In many instances, even longstanding credit engagements are not prolonged. As a consequence, many "Mittelstand"-companies are bound to increase their equity base. One option to achieve this is to partner-up with Private Equity Investors.
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1 Compare IfM Bonn, Basel II - Mittelstand vor neuen Herausforderungen -, Nov. 2001, Slide 9
2 A local bank that is very close to its corporate clients, knows them well and exclusively provides nearly all banking services to them
