Saturday 8 December 2012

Have the loan markets ruined my AIM Xmas pressie?

The reality of the terrible financing situation in the UK for many small and medium sized firms at present is very clear in the markets when you look at volumes and the share prices of the harder to finance smaller firms. The bank loan markets, for so long the source of the majority of funding, have had a terrible year. Indeed, in a little known fact, the volumes are now at the same level as the post-Lehman’s crash.

Many in the financial press compare this to some kind of sporting event, as they focus on the collapse in Debt Capital Markets whilst pointing to the strength of the government bond markets in contrast. However, as usual, they miss the bigger picture. Large companies like Vodafone and Shell can indeed get away bond issues at such attractive levels that their traditional reliance on bank debt funding has fallen away. Also, the dearth of M&A activity has meant that demand for loans is also at record lows. Earlier in the year some big M&A deals really helped Q1 but this has also become somewhat more muted.
The summer was really bad and although a degree of late year rebound has occurred it is not much. Of course Shell and Vodafone and Xstrata are good credits but the secondary and junk markets for bonds are quiet.

What this means is that but for the big beasts, the credit markets for smaller and medium sized company bonds are closed and so consequently the demand for debt is very low. So, for an AIM company there are two huge challenges.  One is that any financing needs are going to be hard to fill as the companies are not seen as good credits. Secondly, is the exit routes  are via take-out or merger or acquisition. With banks not funding these, nor even being asked to draw up facilities, it suggests that M&A is still off the agenda for some time to come.

This challenge in the loan markets is a big part of why AIM valuations have not caught up with the current FTSE100 rally, in 2010 and 2011 volumes in these markets were back to 2006/7 level. Now they are at 2009 levels – and lo and behold – AIM companies share prices look more like 2009 than 2010.

The bad news is, no one in the City sees a very good year next year and the pick-up in volumes on AIM will likely take a while. So absent some big event changing news, pricing on AIM is going to remain tough.

The upside to this is long-term plays. Good entry levels are now available to these macro trends, and SBM favourites likes Xcite Energy and EMED mining sit at huge discounts to NAV’s. OK, so the markets suggests this will continue absent news, but with good events likely in the next quarter, these companies are still priced to go.

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Budgie said...

This is a serious malfunction in the way our markets work. The question is: do we just wait until banking begins to function like it did before, or do we devise alternatives?

You imply we should wait. I don't agree. The AIM tiddlers could regard their existing shareholders as an asset instead of a nuisance. And instead of diluting the shares to predator finance houses, they could make a public offering.

For those AIM businesses with good assets (Xcite, EMED etc), I think they would be surprised at the cash and goodwill from existing shareholders, especially if the alternative is for the business to go under, or be devoured for a pittance.

CityUnslicker said...

Budgie, the cost of a rights issue is even more than that of the finance - plus ca change.

There is a good case for it though, you see EMED raising money direct from the chinese for instance, rather than pure bank funding.

Budgie said...

CU said: "the cost of a rights issue is even more than that of the finance"

How much? Some of the deals seem to give a massive amount to the financiers. Could the business issue the extra shares itself rather than using the more normal rights issue route via an institution?

CityUnslicker said...

Budgie - unlikely, on AIM you have to have your nomad do it,plus you need to find the investors - sad but true!

Crowd sourcing funds will happen one day but its a few years off yet...

Anonymous said...

Did the banksters who provided fickle funding at confiscatory rates actually perform a socially useful function?

Post-bankster financial markets are to be welcomed, be it shareholders, crowdsourcing etc.

Budgie said...

Anon, funding was better with the "banksters". Post-bankster financial markets don't work, so are to be deplored.