A constant and strongly growing demand has been evidenced by a number of medium, and also smaller sized private and public companies in Europe, both West and East, for obtaining finance for much needed expansion. The preferred way would be to look to the capital markets for this finance, but recent developments have greatly restricted this possibility. The alternative is to encumber their assets substantially in order to support the usually heavy borrowing requirement.
In the early 1980s, all major European Stock Exchanges established stock market segments for smaller companies. These "junior stock markets", as they are also called, were intended to promote equity finance by enabling more companies to go public. The "Unlisted Securities Market" (USM) of the London Stock Exchange and the "Official Parallel Market" (OPM) of the Amsterdam Stock Exchange as well as the "Mercato Ristretto" in Italy and the "Second Marche" in France were among the first of these new stock market segments. The initial results were encouraging. Many new companies went public and sought a listing of their shares in these market segments. Investor participation and trading volume were quite satisfactory.
In the late 1980s, however, this trend reversed. Both the number of new issues as well as the trading volume fell dramatically. As a consequence, the Amsterdam Stock Exchange closed its OPM at the end of 1993. The London Stock Exchange also decided to abolish the USM by 1996. This situation led Interfinance to structure a new and alternative, but equally effective means of obtaining funding from the capital markets for suitable companies, which might otherwise be left without this option, due to the above circumstances.
The search for capital markets funding by companies in Europe, both east and West, has already given rise to incursions into the market by an increasingly large number of companies. Their shares will trade in greater numbers and amounts on domestic stock exchanges, as well as through American Depository Receipts (ADRs) in the New York and European, public capital markets.
A similar situation has already been witnessed in Latin American countries, such as Mexico, Chile, Argentina, and Brazil; and the trend seems to be gaining momentum in other emerging market countries as well. In 1991, the volume of shares sold overseas through ADRs was over $ 5 Billion. Most of these issues were Fortune 100 equivalent companies; and the records show no signs of this abating. Just one specific example at the beginning of the trend is that, alone during the month of May, 1992, over U.S. $ 855 million entered Argentina, primarily to invest in the local, public, capital markets.
Previously, most of the companies which benefited from this new capital infusion in the equity markets were the larger, better known companies. How ever, more recently, medium and smaller companies (secondary, emerging companies) have been able to raise equity capital. It is for both the devel oped, small to medium size, as well as the emerging, European companies that an alternative means of seeking liquidity in the public markets has been structured by Interfinance Limited. Details can be supplied upon receipt of full corporate details and business plan of applicants.
As mentioned in our last two newsletters, Interfinance has streamlined its communications by placing these largely on an exclusively electronic basis. Recently it has placed itself firmly on the Information Super Highway, by establishing a WWW-Site there. For users of Mosaic, It is now possible to call up documentation, such as an application, and other forms, on their screens, and to submit applications direct to Interfinance electronically. This represents a great saving, not only in cost, but particularly in time.
A number of Australian corporations have recently approached Interfinance Limited to obtain project funding for them. Most of the applications from Australia in the quarter were based on ventures with Chinese business, or within China itself. This is probably not surprising, since China, seeking to reduce reliance on the United States and Western Europe, and Australia, looking to increase its role in Asia, have been moving closer in recent times.
In fact, two-way trade, while still small, has increased rapidly. In 1993, the volume was a record U.S. $ 3 billion, up 29 percent on the previous year, according to Chinese figures. Australia's statistical bureau puts the volume in 1993 at AUS $ 4.8 billion U.S. $ 3.5 billion), an increase of 40.5 percent over 1992. It reckons imports from China grew 29 percent to AUS $ 2.55 billion and exports to China 55.7 percent to AUS $ 2.27 billion, making China its sixth-largest trading partner and Australia No. 10 among China's. Trade is forecast to top AUS $ 6 billion in 1994 and AUS $ 10 billion by the end of this century.
Reflecting the presently changing economic and trading patterns world wide, the geographic source of business handled by Interfinance in the preceding quarter continued its expansion not only into the Far East and the Pacific Rim, but also into areas which were previously relatively inactive.
Germany and the United States, as the major economies, and as expected, continued to provide the majority of business. However, seemingly due to the impetus of the NAFTA agreement, business handled on behalf of Mexican clients has become significant, and continues to increase.
The emerging economies of Eastern Europe show increasing demand for capital, and business handled from these countries increases steadily. Former Soviet economies exhibit a constant demand, and, although funding of many projects there has proven difficult, the situation grows gradually easier, as the announcement below indicates.
A recent study by researchers at the Federal Reserve Bank of Chicago in the U.S. has shed some interesting light on the accessibility from banks of com mercial and industrial credits.
They point out that since 1985 commercial banks have become active partici pants in the interest-rate derivative products markets either as end-users or as intermediaries or as both. Over this same period significant changes were made in the composition of bank portfolios. An investigation of the rela tionship between the lending activities of individual banks and their participation in the interest-rate derivative markets showed that banks which utilized over-the-counter (OTC) interest-rate swaps experienced greater growth in their commercial and industrial (C&I) loan portfolios than banks which did not use these financial instruments. This result is consistent with a 1984 model, which predicted that intermediaries' use of derivatives enables increased reliance on their comparative advantage as delegated monitors. Consistent with banks viewing loans and securities as substitutable assets, it was found that securities portfolio growth is negatively related to banks' use of OTC swaps. By contrast, the use of futures is associated with no change in C&I loan growth and a positive change in securities portfolio growth, suggesting futures contracts allow banks to better manage the interest-risk exposures in their securities portfolios.
Central bankers from 5 large industrial nations recently gave optimistic views on inflation, but revealed nothing about impending changes in interest rates. The U.S., France and Germany all gave indications that they believed that inflation was at least under control. British and Japanese bankers were also present. The bankers apparently viewed recent turmoil in the bond markets more of a "puzzle than a problem".
Economic forecasters at the OECD are projecting gross domestic product will grow 2.6% in the industrialised world in 1994, rising to 2.9% in 1995. They also expect inflation to remain low, at around 2.1% this year, and 2.3% in 1995.
Interfinance has identified 7 new sources of finance for small and medium sized projects in the Russian Federation. These sources cover a wide range of project funding. Some examples. One of these sources will make early-stage investments in projects of Russian companies, and in joint ventures between Russian and Western companies.. Another is active in the oil and raw materi als sector; another in housing; and yet another in food manufacturing and distribution.
China has opened an import-export bank, the second of three new "policy banks" that will provide long-term, low-interest loans to approved government projects, the official Xinhua News Agency reported. The Import and Export Bank of China will finance major trade deals by providing import and export credits, the report said. The central government will inject the funds required for the bank's capital assets, it said. The bank itself will issue bonds domestically and internationally to raise working capital.
Shanghai, China's leading commercial center, has designated six service industries as top priority development industries to serve the whole of China, according to a municipal government official. Finance, along with insurance, commerce and trade, is at the top of the list. The official said the first three industries have become a "driving force" behind Shanghai's fast-growing service sector. These three industries furnished 73 percent of the sector's added value of 57.2 billion yuan in 1993. The service sector accounted for about 38 percent of the city's gross domestic product in 1993. The sector's ratio in Shanghai's economy is expected to grow to 40 percent this year. in addition, the added value of the financial and insurance industry shot up to 14.1 billion yuan in 1993 from roughly eight billion yuan in 1991. The finance and insurance industry now accounts for nearly one- tenth of Shanghai's economy.
Almost as if lending support to that announcement, there was news that the Australian insurer National Mutual entered the Chinese market by opening its first representative office in Beijing on May 4. So far, more than 40 over seas insurers have opened offices in the country. Around the same time, Coopers and Lybrand, the first international accounting firm and management consultancy to open a branch in China, is preparing itself for brisker busi ness there. The firm, which opened its Beijing branch in 1981, has formed a multinational team of managers to bolster its presence in the country. The opportunities to be involved with Chinese firms is quite obviously enormous, and Interfinance Limited is moving forward rapidly to assist companies in their financial needs in this market.
Beijing is cracking down on some of its chaotic futures markets, ordering a halt to trading in dozens of commodities contracts in a battle against speculators who are fueling inflation.
Key commodities affected are steel, sugar and coal. In addition, China's largest metals exchange in Shanghai, which mainly trades copper futures, has been instructed not to accept bank guarantees and to shift to a cash-only payment system starting July 1.
The crackdown reflects official alarm at rising commodity prices that are stirring public anger.
Hong Kong's pacific concord holdings limited will have invested 6 billion yuan (about 800 million dollars) in mainland China by the end of 1997 and is set to far exceed its original plan to set up a chain of 30 department stores.
Pierre Cardin has signed a letter of intent with two Chinese companies to set up a joint garment factory in Beijing. the Beijing Qinghe Worsted Mill and Citic, Australia, will cooperate with the French fashion designer in the 5 million dollar project. Pierre Cardin said he wants to double or triple the 100 retail shops he has in the country.
The question of what is an optimal debt ratio is one which has brought many a lender into conflict with potential borrowers. It also often affects the situation between borrower and lender, when the borrower seeks additional credit from its lender.
The whole concept of an optimal debt ratio has now been questioned by a very prestigious School of Management in the U.S.A.
Researchers there have tested traditional capital structure models against the alternative of a pecking order model of corporate financing. Their conclusion is that the basic pecking order model, which predicts external debt financing, driven by the internal financial deficit, has much greater explanatory power than a static trade off model, which predicts that each form adjust toward an optimal debt ratio.
They concluded that the power of some usual tests of the trade-off model is virtually nil. In the final result, they question whether the available empirical evidence supports the notion of an optimal debt ratio at all.
The world bank has approved U.S. $ 580 million in loans to China. The loans will be for a term of 20 years, and carry a variable interest rate, which is currently 7.27 percent. The use of proceeds will be for highways, infra structure, and forest development.
The loan to Mexico is in the order of U.S. $ 918 million, to be used mostly for environmental purposes. Draw down will be over a period of 8 years; maturity will be in 15 years, and interest for the first 5 years will be at a variable rate, also presently at 7.27 percent per annum
The World Bank will loan the Indian Renewable Energy Development Agency (IREDA) $145 million to promote solar, wind, and small hydro projects. IREDA is aiming at a goal of 2,000 MW of renewable energy generating capacity by the end of India's current five-year plan in 1997. It sees the country's wind potential at 20,000 MW overall, compared to 17,000 for biomass energy and 5,000 for small hydro.
The European Investment Bank has lent Morocco 80 million ECU (USD 96 million) to finance a link with the European Union's electricity grid.
A 30km (18 mile) long cable will link the European grid with Morocco under the Straits of Gibralter by 1996, and will transfer 300 megawatts of power.
Moroccan demand for electric power has been increasing by 6% per annum; and a steep decline in hydro-electric output caused by droughts has led to power cuts in industries. It is planned to double the output by the year 2006.
Contracts are to be awarded shortly to foreign, private enterprise to build two, new power stations. Finance for these projects is also anticipated to be a major undertaking.