About corporate loans
“Four to five years is the maximum – longer financing terms are not provided by the principal bankers.” This is an observation frequently made in personal discussion by many corporate managers responsible for procuring financing. The continuing financial crisis and the requirements under Basle III are two major reasons why this is unlikely to change in the foreseeable future.
However, corporate investment and financing projects, for example to expand production, open and develop new business lines or acquire other companies, often entail far longer financing horizons than 4 to 5 years. Consequently, companies already need to look out for follow-on financing after 2 or 3 years have passed. And this also entails a wide range of risks and uncertainties: the interest rate at the time of the refinancing, macroeconomic developments and the company’s own situation.
The current low level of interest rates, long maturities and the use of additional non-bank sources of outside capital are major reasons why companies seek to use financings provided by non-bank lenders. Pension funds and foundations play a major role in this regard as financial intermediaries. Their funds are deposited for the long term and may also be disbursed in the form of corporate loans. The parameters are: a financing period of 5 to 12 years, a financing volume per company of € 20 million to € 200 million, no furnishing of collateral, and a bullet structure or variable repayments. The coupon rate is fixed for the entire term at the start, so that corporate borrowers can benefit from the present low interest rates for a long time. The level of the coupon rate depends on the long-term capital market rates in place at the time of closing and the credit worthiness of the company concerned.
From the first meeting to fund disbursal, the procedure often takes less than eight weeks. Companies usually use the outside financing obtained for investments, as a strategic reserve or to refinance short-term debt. An owner-managed company in North-Rhine Westphalia recently received app. € 200 million with a bullet maturity of 10 years from institutional lenders in the context of an acquisition financing. The terms were better than those of the short-term financings provided by banks. Not only the company is very satisfied with this solution; the banks involved also value the supporting financing by other lenders.
Alongside conventional bank loans, these funds represent a second financing pillar which grows along with the company’s other financings. In fact, foundations and pension funds think and operate similarly to owner-managed companies: Their aim is to secure existing corporate assets for the next generation. The financings obtained from these sources serve as a stable long-term foundation for the continued growth of a company, and they also contribute to making its financing structure more balanced and maturity-matched.
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