ROLAND BERGER STRATEGY CONSULTANTS

CONTENT

Corporate financing is more

challenging than ever | Only
a long-term strategy can
successfully meet the challenge | Structuring financing
in line with the business
model and using alternative
instruments offers real
competitive advantages |
Roland Berger launches a
new Corporate Finance CC

OKTOBER 2009
NOVEMBER
2010

Fresh thinking for decision makers

THE CORPORATE FINANCE

COMPETENCE CENTER:

3
9
270
350

CONSULTANTS IN GERMANY

WITH OVER
YEARS OF
CONSULTING EXPERIENCE IN TOTAL
AND MORE THAN
SUCCESSFULLY
COMPLETED PROJECTS WORLDWIDE.
CORPORATE FINANCING IS FACING NEW CHALLENGES
and a sharp increase in complexity. To meet the needs of our clients,

We are the people to speak to whether you need to identify new

we have created a new Corporate Finance Competence Center at

investment targets, integrate and develop them, optimize your

Roland Berger Strategy Consultants. The Corporate Finance CC brings

capital structure, carry out an IPO, manage your financing risk

together our many years of experience in all areas of corporate

or place a new focus on portfolio or value management. Working

finance, in particular:

closely with the Roland Berger network, we offer comprehensive

solutions and a high level of market and implementation
competence.

Financial advisory
Support for M&A and private equity

Corporate
Finance
CORPORATE FINANCE THE NEWEST COMPETENCE
CENTER OF THE ROLAND
BERGER NETWORK
Our global perspective based on
international experience and expert
knowledge ensures innovative yet
pragmatic business solutions.
Source: Roland Berger Strategy Consultants

Corporate
Performance
Marketing &
Sales
Operations
Strategy

te

EPHT

Civil
Economics

Transportation

Pharma &
Healthcare

InfoCom

Financial
Services

Consumer
Goods & Retail

FUNCTIONAL CC

Energy &
Chemicals

INDUSTRY
CC

Automotive

Value creation

Consultant
teams

Consultant
teams

Consultant
teams

Consultant
teams

Consultant
teams

Consultant
teams

Consultant
teams

Consultant
teams

Consultant
teams

Consultant
teams

Consultant
teams

Consultant
teams

CONTENT C o r p o r a t e f i n a n c i n g

I. THE AFTERMATH OF THE CRISIS

Since the middle of the last decade, corporate finance has involved ever large sums of money
and a steadily growing choice of financing instruments. New borrowing in Germany was
EUR 745 billion in 2005, compared to more than EUR 1.1 trillion in 2008 at the time of the last
economic peak. Despite a fall caused by the crisis, 2010 will again see volumes of borrowing
well above the level of 2005, at between EUR 830 and 910 billion. Demand is strong.
But the global economic and financial crisis has made it much harder for companies to get
their hands on the capital they need. The good news is that Germany and some other countries
are showing signs of economic recovery, albeit somewhat fragile at the moment.
To turn this into a long-term growth trend, companies need a solid financing basis giving them
sufficient room for maneuver to exploit market opportunities and set their sights firmly back
on expansion. In the aftermath of the crisis, companies particularly small and mediumsized enterprises (SMEs) find themselves in a tricky position.

EXTERNAL FINANCING
The availability of equity and dept is limited

LIMITED INTERNAL FINANCING CAPABILITIES

In terms of internal financing, the crisis has considerably weakened firms. Sinking operating
earnings have eaten into cash reserves. As the economy slowly recovers, companies need
to increase working capital and investments both of which require financing.

LIMITED AVAILABILITY OF EQUITY AND DEBT

On the one hand, the availability of equity on the capital markets is limited. IPOs are difficult
due to the high level of volatility and uncertainty persisting on stock markets. The same goes
for increases in equity, for which it is difficult to drum up support. Access to debt has also
become more difficult. Banks are less willing to loan, credit terms have become tighter and
interest rates have risen as credit ratings have suffered. It is unclear at present what the
precise impact of stricter equity requirements for banks under Basel III will be but they are
unlikely to make it any easier for businesses to secure external financing.

THE COMPLEXITY OF FINANCING IS INCREASING

Companies must reckon on facing greater limitations with regard to financing in the coming
period. For current and future refinancing projects, the level of permissible debt will be lower
than before the crisis. Financing and collateral structures have become more complex and
a need for refinancing has arisen for example as mezzanine programs have come to an end.
Securing a solid financing basis is more important and more complex than ever before.
It is a central decision-making area for companies and must be placed at the top of the agenda.
Businesses need to find the best possible solutions to the inescapable challenges. To choose
the right financing instruments, they need to understand the specific situation they find
themselves in.

SECURING A SOLID FINANCING BASIS IS MORE

IMPORTANT AND MORE COMPLEX
THAN EVER BEFORE
Getting the balance between internal and external
financing right is no easy matter

ROLAND BERGER STRATEGY CONSULTANTS

To answer these questions, a new Roland Berger study investigates the financial position of
German SMEs after the crisis and what they can do to meet their future financing needs in
a smart, sustainable manner. In this edition of think: act CONTENT we present the key findings
of the study and our recommendations for action.

ALMOST HALF OF THE COMPANIES IN

THE SURVEY SAW THEIR RATINGS
CHANGE LAST YEAR
CHANGES TO RATINGS
Better
No change
Worse

26
53
21

THE MAJORITY OF COMPANIES IN THE

SURVEY ARE FOCUSING ON GROWTH ISSUES
FOCUS ON
Growth only
Refinancing and growth
Refinancing only

61
Source: Roland Berger study

5
34

II. GERMAN SMES BUILD A BASIS FOR GROWTH

Experts were largely united in their skepticism about Germany's position during the crisis
and shortly afterwards. International bodies such as the IMF, German banks and other
observers forecast slow growth in 2010 and 2011. Even this faint optimism was ringed with
provisos. It wasn't until the surprisingly good figures for the first half of 2010 were published
that growth expectations improved and edged above the 3% mark.
Our survey of 300 SMEs found that companies in Germany are setting their sights once
again on expansion. In fact, they started doing so even as the experts were warning of further
economic troubles. We found clear evidence that companies survived the crisis much better
than could have been expected during the global economic turbulence. Overall, ratings and
collateral requirements did not worsen; indeed, a substantial number of respondents report
better ratings than ever before. However, among companies having to renegotiate loans
during the crisis, the proportion facing new restrictions due to stricter covenants was 43%.
The irony, of course, is that companies need fewer restrictions not more over the coming
months. Growth has moved up the agenda. It is the main thing driving financing in 2010 and
2011. A remarkable 61% of companies in the survey said that growth is the sole focus of their
financing, while just 5% list refinancing as a central topic for 2010 and 2011. We found the
same thing across all industries, with very little variation. Some 37% of firms expect their net
financing requirement to be higher in 2011 than in 2009, and 6% say it will be "much higher".
They generally explain this in terms of increasing working capital and making larger investments so as to exploit the opportunities offered by the global economic recovery.
Clearly, German SMEs believe they have great growth prospects.
At the moment, however, they often decide how to finance this growth on a case-by-case
basis, snapping up offers where they see them. Just 28% of companies in the survey
implement a long-term financing strategy. Here we found clear differences between
industries: the automotive industry generally has an eye to the future, while the majority
of service companies act in a rather more ad hoc manner.
When choosing financing instruments, companies evidently want to keep things as simple
as possible. The size of the business plays a key role. Larger SMEs draw on a wider repertoire

CONTENT C o r p o r a t e f i n a n c i n g

Companies that report failure to secure bank loans in recent months generally turn to their
shareholders for help. Additional loans, increasing capital and leasing agreements are popular
alternative sources of financing. But almost one in five companies say that they did not turn
to an alternative source of financing, giving up on the planned project and carrying on with
day-to-day business without the help of additional capital. That, at least, is a pragmatic
approach. But it also reveals the major demand for financing and hence potential that is
being neglected as the recovery gets underway.
A complex picture, no doubt about it. But one thing is clear: the situation with regard to
financing and the related requirements are changing fast. To profit from the economic
recovery, companies not only need to sniff out opportunities on the market. They must also
keep their need to secure suitable funds at the front of their minds.

III. OUR RECOMMENDATIONS FOR FUTURE-PROOF FINANCING

No two companies are alike when it comes to financing needs. But the lesson of the crisis
is relevant for everyone. Three basic rules apply:

A PRAGMATIC APPROACH CAUSED BY A LACK OF OPTIONS

1in5
Alm
os
t

of financing instruments; smaller SMEs focus more exclusively on equity and bank loans.
But bank loans are also a preferred type of financing for larger companies.

companies carried on business without

the help of additional capital.
Source: Roland Berger Study

German SMEs are tough cookies. They know

how to make the best out of a bad situation.
Many SMEs are not expecting the situation
to get better any time soon.

Employ a long-term financing strategy

Structure your financing in line with your business model
Use alternative financing instruments

The companies in the survey identified four key

challenges for the future:
1. Raising the volume of financing a key

What does this mean in practical terms? To find out more, read on.

challenge for 13% of firms

2. Improving their rating 12%

1. EMPLOY A LONG-TERM FINANCING STRATEGY

The companies that stick closely to a long-term financing strategy currently form a minority.
However, our study shows that a long-term financing strategy generally allows firms to
optimize their financing conditions and structures. This optimization must be seen in relation
to corporate strategy, involving the interplay of structures, conditions and risk. Almost half of
the companies in the survey who followed a long-term strategy experienced benefits in the
form of better conditions, a good rating, less complexity, lower risk and a solid, trust-based
relationship with the providers of financing. This puts them in a much stronger position than
their competitors with regard to the challenges of increasing financing volumes, keeping
ratings stable and minimizing the risks of follow-up financing.

3. Refinancing financing agreements that

are soon to expire 10%
4. Coping with increased financing costs 9%

ROLAND BERGER STRATEGY CONSULTANTS

LIKE IN CHESS
A long-term strategy is the key to winning

For 50% of companies in the survey, existing financing arrangements will come to an end in
the next two to five years. At the same time, most companies expect their financing needs
to expand. Companies must start focusing their attention on where their financing will come
from in two to five years time. Increasing financing volumes cannot be secured on an ad hoc
basis especially where there is competition on capital markets. Companies need to assess
and structure their financing requirements as part of a long-term financing strategy. They
should be guided in this by the objective benefits of a long-term perspective rather than
being seduced by the subjective positive feelings of an ad hoc approach.

2. STRUCTURE YOUR FINANCING IN LINE WITH YOUR BUSINESS MODEL

Our study found that small companies in particular tend to take an ad hoc approach to
financing. They view covenants, reporting requirements and winning the trust of the providers of financing as the main challenges facing them in the period ahead. Large international
companies, on the other hand, structure their financing around centralized companies or
holding companies and foreign subsidiaries. Companies should structure their financing
in line with their business model. They should focus their attention on the key components
of a conservative financing structure, including maturity matching, balance-sheet and debt
ratios, balanced costs and minimal dependency on individual providers of financing. As they
make more and more use of alternative financing instruments, they need to integrate these
into an overall financing structure.

IN FOCUS
Structure your financing in line with your
business model

This is true also for financing direct investments or exports of German SME. In the past,
these activities were mostly financed by German banks and transferred via intragroup loans.
International financing becomes local, integrating regional banks. For companies that take
the long-term view, structured financing is essential for ensuring transparency and manageability. Structuring builds trust with the providers of financing and at the same time reduces
administration. Ad hoc financing arrangements may look more simple and affordable on
paper, but they can have a negative impact on the financing structure and lead to expensive
one-off solutions. The right structuring also enables companies to cushion the impact of
external factors such as currency and country risks more effectively, thereby reducing the
burden on operations.
3. USE ALTERNATIVE FINANCING INSTRUMENTS
Small companies, due to their size and regional focus, often concentrate on traditional bank
loans for their financing needs. However, banks are finding it more difficult to meet demand
in the current difficult economic situation than during the preceding period of growth. As a
result many of the companies in our survey say that they cannot secure big enough bank

CONTENT C o r p o r a t e f i n a n c i n g

IV. LONG-TERM STRUCTURED FINANCING

A TRUE COMPETITIVE ADVANTAGE
The general credit crunch widely predicted as a result of the financial crisis has not materialized. Nevertheless, managers are paying more attention now to robust corporate financing
that looks beyond the short term. Ad hoc attempts to secure financing as quickly as possible
so as to tie up fewer resources and not miss out on any opportunities is short-sighted. It can
even put the very survival of the company at risk. Developing a suitable financial structure
takes more time. In the case of smaller companies, it may require bringing in external
expertise. But it is an effective way to manage refinancing risks and balance interest costs
and the expense of meeting reporting obligations. Taking an approach that looks beyond
traditional sources of financing also allows companies with production plants in different
countries to build a natural hedge against currency fluctuations. This is a complex task that
offers considerable benefits in the medium to long term compared to what appear at first
sight to be simpler solutions.
Companies that wish to tap the potential of the current recovery should not drag their heels
over this. They need to quickly develop the solution that suits them best. In previous periods
of economic growth, German companies were somewhat slow off the mark compared to
their international competitors. This time around many firms have boldly implemented tools
such as short working time as a way of protecting their workforce and ensuring that they
can ramp up capacity as soon as the crisis eases. Now they are making the most of the
opportunities this has given them, confident that recovery will follow swiftly. They should
take the same courageous, long-sighted approach to reviewing their financing needs.
Where they see problems ahead, they should not be afraid of making far-reaching changes.



Larger companies, by contrast, are making increasing use of alternatives to traditional bank
loans. These alternative instruments give them more room to maneuver. They enable them to
diversify their financing basis, spread risk and achieve greater flexibility. What is more, many
of these alternative financing instruments are no more complicated in terms of their structure and application than large bank loans.

USE ALTERNATIVE FINANCING INSTRUMENTS

While small companies often rely on few banks

and financing instruments ...

 


loans, or even have difficulty getting any at all. Often they fail to identify alternative sources
of financing. Consequently projects fall by the wayside or rely on ad hoc financing, which
brings with it a much higher risk of failure.

... big companies enjoy a wide range of different

financing options

PLEASE CONTACT US
SHOULD YOU HAVE ANY QUESTION

Dr. Sascha Haghani, Partner und Head of

CC Corporate Finance
+49 69 29924-6111
sascha_haghani@de.rolandberger.com
Dr. Klaus van Marwyk, Principal
+49 211 43 89-2976
klaus_vanmarwyk@de.rolandberger.com
Jrgen Mller, Senior Project Manager
+49 211 4389-2968
juergen_mueller@de.rolandberger.com
Johannes von Neumann-Cosel, Senior Consultant
+49 211 4389-2252
johannes_vonneumann-cosel@de.rolandberger.com

think:act CONTENT
Editors:
Prof. Dr. Burkhard Schwenker, Dr. Martin C. Wittig
Overall responsibility: Torsten Oltmanns
Project management: Dr. Katherine Nlling
Layout: Roland Berger DesignTeam
Roland Berger Strategy Consultants GmbH
Am Sandtorkai 41
20457 Hamburg
+49 40 37631-4421
news@rolandberger.com
www.think-act.info

Would you like to get your copy of

think:act CONTENT faster?
Send your e-mail address to us at
global_marketing@de.rolandberger.com
and you will receive the next issue
in advance!