Europe's companies shunning expansion to hoard cash

LIVERPOOL, England, April 17 Mon Apr 16, 2012 7:01pm EDT

Related Topics

LIVERPOOL, England, April 17 (Reuters) - Treasurers of Europe's top companies are showing few signs of loosening their grip on billions of euros in cash hoards which could be key to the region's economic recovery.

"It's still a fairly risky environment overall... Treasurers still want to hold on to cash," said Roger Appleyard, head of credit research at RBC Capital Markets in London, speaking ahead of a annual conference for corporate treasurers.

"You've got operating expenses, like marketing, but companies aren't investing in capacity or ramping up for future growth. There's still a real lack of confidence about where growth is going to come from."

Europe's biggest companies are sitting on vast piles of money.

In the UK alone, company cash balances are now worth over 756 billion pounds ($1.20 trillion), or 50 percent of Gross Domestic Product, a report by the ITEM Club, an economic forecasting group, showed this week.

But business investment rose just 1.2 percent in 2011, and was 17.5 percent down on its late-2007 peak, the group said.

The shaky economic outlook inhibiting their investment plans is likely to be top of the agenda at the three-day meeting - as will be their role in an eventual recovery.

CONCERNS FLARE UP

Funding conditions are similar to those in 2009, when companies flocked to the bond markets for financing at record cheap rates, sparking a boom for investment banks.

But when companies are borrowing in the markets, it's mainly not to back expansion or acquisition plans, but to make sure their funding mix is well balanced between bank loans and bonds for instance, or to refinance upcoming debts.

"Declining funding costs mean companies are pre-funding maturing obligations for next year... They are in defensive mode though and there is little pressure for them to leverage up now," said Suki Mann, credit strategist at Societe Generale.

In terms of issuance volumes of bonds in euros, the first quarter was a "cracking" one, Mann said.

But even that mood was now souring, because of flaring concerns over Spain's fiscal position and ahead of the French elections, which has prompted fears it could result in a less business friendly environment, he added.

The euro zone concerns are also knocking the confidence companies have in their bank lenders, as some pull back from lending to build up their capital, raising fears in some quarters that they could see a repeat of 2008, when panicked lenders began cutting credit lines.

Small and medium sized companies, meanwhile, are still struggling to gain access to credit, another source of consternation for treasurers. Many complain that when financing is available, it is now prohibitively expensive.

This is prompting government-backed initiatives to get credit flowing again, while new-fangled ventures such as peer-to-peer lending, which allow individuals to lend to each other or to small companies, are gaining popularity.

But while the ITEM club said SMEs were critical in generating jobs, it added that large companies normally accounted for four fifths of business investment.

FILED UNDER: