European companies will have to face a capital deficit of between 450 and 600 billion euros after the crisis generated by Covid-19, according to a study carried out by the professional services firm PwC and the Association for Financial Markets in Europe (AFME).
According to the document, Europe will need approximately ?1 trillion of capital to cope with the economic recovery. Between capital and hybrid public and private sector instruments across the EU, the current capacity is between EUR 400 and 550 billion for the next two years, so the need is between EUR 450 and 600 billion.
Failure to fill this capital gap would result in a “very damaging increase” in the leverage and operational flexibility of the business sector. According to AFME and PwC estimates, 10% of European companies only have cash reserves for the next six months and are therefore at risk of becoming illiquid.
The report does not detail specific data by country, but AFME and PwC estimates that the impact of the crisis on the Spanish business fabric is 155,000 million euros, 15.5% of the total of one trillion euros of capital required by companies in the 27 countries of the EU.
In this context, the association has urged the European Commission and the Member States to approve measures to “strengthen” the hybrid and equity markets in Europe, as well as to accelerate the completion of the Union of Capital Markets.
“While debt and government support have meant short-term bailouts of companies across Europe, we now need to move beyond short-term bridge financing and focus on long-term repair and recovery,” stressed AFME Executive Director Adam Farkas.
According to the interviews with entrepreneurs and investors conducted by AFME and PwC, many small and medium-sized companies do not wish to cede control of their business, but are willing to “pay a premium” so as not to dilute their voting rights, as well as to distribute a part of the profits among investors. “Hybrid instruments are ideal for meeting these needs,” the document states.
Among the instruments that should be more widely used in Europe are dual class equity schemes and equity swaps to reduce leverage.
AFME’s recipes also include designing a novel hybrid instrument for the whole EU, extending existing recovery support schemes, replicating existing good practices in Member States regarding hybrid instruments, adjusting state aid rules and accelerating equity investment measures.
“As European companies strive to recover from the economic crisis, alternative types and sources of financing will be needed to help alleviate the growing debt burden and at the same time be able to invest in their future. This is where equity and hybrid markets can play a key role in supporting the recovery in Europe,” Farkas said.
“The withdrawal of government support and the early lifting of the containment measures by Covid-19 with a successful vaccination programme means that the time has come to implement the equity and hybrid financial capacity and infrastructure to drive the recovery of the European economy,” added PwC’s Director of Economic Consulting, Nick Forrest.
Fuente: El Economista.