Equity and hybrid markets hold solution to European Covid-19 corporate recapitalisation, says AFME
A report by the Association for Financial Markets in Europe (AFME) and PwC reveals that an equity shortfall of up to EUR600 billion threatens Europe’s economic recovery despite the significant public support measures and private capital made available across Europe to support economies during the pandemic.
AFME is calling on the European Commission and members states to introduce measures to bolster Europe’s equity and hybrid markets and expand funding avenues for businesses, further enabling Europe’s economic recovery
In a report published today (19th) in partnership with PwC, AFME warns that Europe needs to bridge a gap of EUR450-600 billion in equity needed to prevent widespread business defaults and job losses as Covid-19 state support measures are gradually reduced. The report Recapitalising EU businesses post Covid-19 reveals that despite the support provided by governments and the private sector since the start of the pandemic, 10 per cent of European companies have cash reserves to only last six months. The pan-European trade association is calling on authorities to explore and develop further short-term measures to support Europe’s equity and hybrid markets and accelerate the Capital Markets Union to help fund the recovery. Unless urgent action is taken, a spike in insolvencies could start as early as this month and threaten the EU’s recovery prospects, AFME warns.
The report presents insights from interviews with businesses and private sector investors from across the continent to propose solutions to Europe’s emerging funding gap. The findings reveal that many mid-size and SME corporates do not wish to give up control of their business but are willing to pay a premium not to dilute their voting rights, as well as are willing to distribute a share of profits to investors. Hybrid instruments are ideally suited to address these needs. In order to bolster capital markets to support businesses in the recovery phase, AFME is outlining the following recommendations:
Proposing a new EU-wide hybrid instrument designed specifically for the corporate sector. This could be in the form of a new preferred shared instrument, which is state-aid compliant, to build scale and liquidity, and which ideally could be developed to comply with social investment objectives to attract maximum investor interest.
Scaling up existing EU-wide recovery support schemes such as the EIF European Guarantee Fund tailored to the needs of SMEs, particularly the smallest companies.
Replicating existing member state best practices on hybrid instruments, as well as raising awareness of the range of capital markets instruments available to mid-caps and SMEs who may be unaware such options exist
Exploring further use of innovative instruments, such as dual class shares to address the control concerns of companies as well as debt for equity swaps to reduce leverage.
Recalibrating state aid rules for a systemic crisis.
Accelerating equity investment measures under the Capital Markets Union project.
Adam Farkas, AFME’s Chief Executive Officer, says: “While additional debt and state support have provided the short-term rescue to businesses across Europe, we now need to move beyond the short-term bridge finance and to focus on long-term repair and recovery.
“As European businesses strive to recover from the economic crisis, alternative types and sources of funding will be required to help mitigate their mounting debt burden while also allowing them to invest in their future. This is where hybrid and equity markets can play a key role in supporting Europe’s recovery.
“The size of the challenge calls for urgent action. With a shortfall of up to EUR600 billion threatening Europe’s recovery, we are calling on policymakers to work with the private sector at the national and EU levels to implement solutions to ensure midcaps and SMEs in particular have the resources they need to recover post-Covid-19.”
Nick Forrest, leader of PwC’s economics consulting practice, says: “The Covid-19 crisis risks leaving a long-term scarring effect on the economies of Europe. This means restoring the equity capital base of European corporates is essential for them to drive investment, innovation and growth.”
“The unwinding of Government support and anticipated release from Covid lockdown measures with a successful vaccination programme means that now is the time to put in place the equity and hybrid financial capacity, and infrastructure to drive recovery of the European economy.”