* Carmakers' banking units eye ECB LTRO on Feb. 29
* SMEs turn increasingly to bond markets
* Detachment from banks undermines ECB policy
* Some economists see case for QE
By Eva Kuehnen
FRANKFURT, Feb 24 European companies, fed
up with scant lending from tight-fisted banks, are turning to
new sources of financing, including preparing to tap the
European Central Bank's low-interest loan programme directly.
Some are issuing the first corporate bonds in their history.
But those with financial arms -- particularly carmakers -- are
gearing up to skirt the banks and go straight to source.
The ECB will offer billions in three-year, low interest
loans next Wednesday with uptake of the so-called LTRO expected
to be in the region of 500 billion euros.
Banks took 489 billion euros in December from the first such
operations - a huge injection of money at a time when heightened
bond market tensions and bank funding pressures were putting the
future of the euro zone in question.
ECB President Mario Draghi said after banks tapped the funds
"a major, major credit crunch" had been averted. They used much
of the money for their own refinancing needs and to buy some
sovereign bonds, helping lower Spanish and Italian bond yields.
But little has reached companies and households so far.
Loans to euro zone companies fell at the fastest pace on
record in December and anecdotal evidence seen by ECB officials
suggests the LTRO has not led to a significant pick-up in
lending in January.
"It will likely be slow for the LTROs to make an impact
on bank lending," said Morgan Stanley economist Elga Bartsch.
"Liquidity is only a necessary but not a sufficient condition
that there will be bank lending to the corporate sector."
So companies are not waiting to see whether the ECB's second
three-year lending operation on Feb. 29 will result in an
increase in bank lending to businesses.
Instead, many are adapting to the reality of harsher bank
borrowing conditions -- higher interest payments or tighter
collateral rules, for example, and seeking alternatives.
"On the whole we can see that corporates have been working
hard to become less dependent on the banking system over the
last few years and to rely less on banks for funding," said
Morgan Stanley's Bartsch.
CARMAKERS GO SOLO
Some companies see the LTROs as an opportunity to
short-circuit banks. Large corporates - particularly carmakers -
with their own banking units are likely to be among the bidders
at next week's tender.
Siemens and BMW, for example, have both
overhauled their in-house banking units in the past so they can
tap ECB liquidity directly.
BMW went as far as consolidating its financial services
offshoots from Spain, Portugal and Italy under a German banking
license, BMW Bank GmbH, to be more flexible and to use deposits
as an additional refinancing source.
Carmakers say commercial banks focused on their core
businesses in the last financial crisis in 2008, shunning the
auto sector's retail financing operations and forcing them make
their own funding arrangements.
BMW did not want to comment on whether it would tap the
ECB's cheap funds next week, but the head of BMW Financial
Services Erich Ebner von Eschenbach told Reuters in November
that the company wanted to improve its access to liquidity.
"To ensure a sufficient supply of liquidity even in times of
crisis, we are expanding our own access to capital markets,"
Ebner von Eschenbach said at the time.
The financial service units of Daimler, PSA
Peugeot Citroen and Volkswagen all told
Reuters they would consider tapping the ECB's cheap funds to
finance for example loans and leasing businesses.
Siemens had no comment.
The industrial conglomerate tells a similar tale. Siemens
Financial Services acquired a banking license in December 2010,
which allows it to access ECB funds directly, making it less
dependent on swings in the money market.
The flip side of this is that a growing number of small and
medium firms, also known as SMEs, have turned to the
conglomerate's banking arm for funding as their borrowing
conditions got tougher.
SMEs are among those feeling the squeeze most as they are
most reliant on bank financing, especially in Germany, Europe's
economic powerhouse, where the so-called Mittelstand companies
employ roughly two thirds of its workforce.
In Europe, non-bank funding is generally lower than for
example in the United States, where the private lending market
is developed and 80 percent of total corporate borrowings come
from non-bank debt. In Europe, this is less than a third.
This dynamic is also reflected in the way central banks have
decided to tackle the repercussions from the financial crisis.
While the U.S. Federal Reserve since late 2008 has bought
$2.3 trillion in long-term securities to spur growth and revive
the economy, the ECB is relying on banks to pass on the
unlimited funds it is providing, now also with 3-year loans.
ECB money supply data on Monday may give some
indication on whether the ECB's measures are unblocking the
In Europe's largest economy, Germany, the private lending
market is gaining in importance beyond the non-bank financial
A recent study by Moody's Investors Service showed that
companies are undergoing an intensified structural shift towards
Thanks to the launch of a special segment for smaller
issuances between 25 and 150 million euros two years ago, German
SMEs now also have access to the bond market.
The first to tap the market this year was family-run Scholz
AG, one of the world's largest recycling companies for steel
scrap. After relying on bank funding for 140 years, the
family-run business issued its first bond last week, raising 150
million euros with a 5-year maturity for 8.5 percent interest.
"The company wanted to be more flexible and get a better
negotiating position with its banks," said Peter Thilo Hasler,
managing director at Blaettchen & Partner, who advised Scholz on
"It may be a bit more expensive than a bank loan, but it
makes planning a lot easier," he said. "The old economy is
increasingly looking for alternatives to bank lending."
The German daily Sueddeutsche Zeitung recently captured the
mood with a headline: "Bye-bye, banks".
This detachment from banks, meanwhile, could undermine the
ECB's strategy of flooding the banking system with unlimited
liquidity in the hope that banks pass on the funds to the real
If this fails, the ECB may have to resort to more direct
Some economists said the ECB may have to follow the example
of central banks in the United States, Britain and Japan by
embarking on a quantitative easing (QE) programme - increasing
the money supply by buying securities from the market.
The hawks among the ECB Governing Council members - led by
Germany's Jens Weidmann, Luxembourg's Yves Mersch, and the
Netherlands' Klaas Knot - are, however, likely to oppose such an
measure out of concern that it could fuel inflation.
Morgan Stanley's Bartsch said the ECB could launch QE before
the summer, depending on how well the LTROs work out.
"We need to see whether the ECB's indirect route will work
to avoid a credit crunch," Bartsch said, adding that she was
less optimistic than ECB President Mario Draghi, who said in
January that the first LTRO had avoided a major credit crunch.
"At the moment, it looks as if he could be right, but it is
too early to declare victory. We are not out of the woods yet."