The view from Europe

Eurofactor Kolumne in BCR Factorscan 15/11/2010

In the third of a series of articles from Credit Agricole/Eurofactor, experts in five of Europe’s major factoring markets – France, Germany, Italy, Spain and the UK – provide a brief insight into developments and market conditions across ‘old Europe’.

How has the factoring market in your region fared in general over the last three months? Have there been any major changes or developments? Is it a favourable environment for factors?

UK – Ian Flaxman, Crédit Agricole Commercial Finance:

In the current economic climate, I think that it is difficult to see market changes over relatively short periods. It can be said that new business enquiries have increased a little, but that could simply be a seasonal trend. Generally, it is true to say that a recessionary environment would be favourable for factors, particularly when economic growth returns and companies look to their asset base to generate liquidity to fund growth.

As a company, I think that we have been fortunate to have a strong parent and therefore been able to use our liquidity to develop new business; consequently we expect strong fourth quarter results this year. The factoring industry in the UK is expecting results similar to or slightly better than 2009.

France – Guillaume Baudoux , Crédit Agricole Leasing & Factoring:

The French factoring market experienced a high growth in the third quarter (+21.5 per cent, +21.3 per cent over the first nine months), perhaps more than expected. Eurofactor grew even faster than the market (+24.2 per cent in the third quarter, +23.5 per cent in the first nine months) and thus strengthened its market leadership.

Germany – Stephen Bohner, Eurofactor:

The German factoring market experienced a strong average growth rate of +34 per cent in the first half of 2010. For the last three months there are no new figures available for the factoring market, but it can be presumed that the growth has slowed down slightly in accordance with the slight slowing of the general economic growth rate in Germany.

Nevertheless, the economic environment continues to be very favourable for factors, as growth expectations of German industry are still very positive, according to the latest poll from the German IFO institute. It is expected that the basis of economic growth will broaden from export-driven only to domestic growth, enforced by rising consumer demand and increasing salaries.

Banks have retained their restrictive credit policies, being unable to serve the increasing liquidity needs of German industry, while credit insurers are continuing to sign more credit limits, giving factors more room to engage in new financial deals. The expectations for the fourth quarter are very positive.

Spain – Josep Selles, Eurofactor:

The sector has maintained its growth rate of around 10 per cent that began at the beginning of the year. In 2009, the sector only reached 2008 levels. This was not bad, but this year some circumstances have allowed factoring companies in the region to increase their funding levels.

These include an increase in invoicing figures of clients looking for foreign markets to compensate the fall in the domestic market, and also the appetite of the credit insurance companies, which are granting lines again with less difficulty than in the past two years. We expect to see these trends maintained in the coming months.

Italy – Massimo Mancini, Crédit Agricole Commercial Finance:

The environment is quite positive. In the third quarter the increase of turnover registered was +11 per cent, with strong results in International Factoring (+35 per cent). The expectations for the last quarter are in line with the trends registered throughout the year.

What risks remain at the fore during the fourth quarter? How do you plan to overcome these challenges?

UK – Ian Flaxman, Crédit Agricole Commercial Finance:

The biggest issue is the general lack of activity in the market. Corporate finance transactions, such as acquisitions, are very flat due to general lack of confidence and difficulty in getting funding against intangible assets. Surprisingly, the turnaround market is also quiet, with a large number of businesses in need of financial re-structuring but, through the combination of low interest rates and government support, with payment arrangements for taxation debts, these are not being forced into action.

France – Guillaume Baudoux , Crédit Agricole Leasing & Factoring:

We have had very good results in managing risk since the beginning of the economic crisis, but we remain very careful. The most challenging goal is to succeed in maintaining good rates in spite of the pressure of competition, and increase them where possible.

Germany – Stephen Bohner, Eurofactor:

The importance of risk management remains high, as always in such phases of strong economic growth after a downturn – as we are experiencing at the moment – and the risk of insolvency increases as well. This is reflected in the growing number of company bankruptcies. We therefore stay focussed on tight risk management.

Spain – Josep Selles, Eurofactor:

The main risk remains the capacity of our clients to face the reduction of liquidity in the banking sector. Companies do not only need short term facilities, like factoring. Not all the sales of clients can be factored, so although we can offer them financing this may not be enough. Sometimes the lack of other sources of financing may lead the clients to a slow asphyxia and, as we know, the most dangerous position in factoring is the bankruptcy of the seller, our client. So we focus on maintaining the risk controls we started to implement two years ago, by monitoring the client closely.

Italy – Massimo Mancini, Crédit Agricole Commercial Finance:

The recession is not over. This is positive in regards to the demand for factoring; but conversely, the cost of risk has not yet returned to pre-crisis levels.

Are you concerned about speculation of a ‘double dip’ recession? What measures, if any, have been implemented to guard Credit Agricole Commercial Finance / Eurofactor against this?

UK – Ian Flaxman, Crédit Agricole Commercial Finance:

There is much speculation about the potential for a ‘double dip’ recession. I think that there is a chance that this might be experienced, but my personal view is that, despite recent government spending cuts, we will see a slow and gradual return to growth.

France – Guillaume Baudoux , Crédit Agricole Leasing & Factoring:

We are more concerned about shrinking terms of payment, which lessen the funding amounts companies need for their working capital, and expect that Interbank rates will eventually rise again.

Germany – Stephen Bohner, Eurofactor:

A double-dip seems to be quite unlikely at the moment, as growth is not fragile anymore, but is slowly reaching a broader basis, including growth factors such as consumer demand. This is confirmed by the positive business outlook of the majority of German industry. Factors on the supply side that may threaten further growth in some energy and resource intensive industries, such as the steel industry, are rising costs for energy and cost explosion and supply shortfall of raw material. On the sale side, especially export, further growth can be threaten if the main import countries – such as the USA or China – face economic stagnation or even fall back. The guarding measures are the usual ones in Factoring: debtor risk coverage by credit insurance, a tight watch on client solvency and the development of their sales markets, consequent adaptations in risk exposure, etc.

Spain – Josep Selles, Eurofactor:

It’s a possibility, of course, but for the time being, we haven’t seen any sign of the market going in this direction. It’s also true that if this situation arrives, Spain won’t be the first country to suffer, so we will have some time to plan and set up extra measures in terms of risk control.

Italy – Massimo Mancini, Crédit Agricole Commercial Finance:

We have maintained a high alert focus in respect of risk management. Operations and credit departments have adopted a very tough evaluation and management process since the end of 2008, selecting and managing only worthwhile opportunities.

Have you made any changes to your operations and product offering in recent months? Are particular products gaining/losing popularity?

UK – Ian Flaxman, Crédit Agricole Commercial Finance:

In the UK, the key product continues to be Confidential Invoice Discounting and I cannot see this changing in the short term. There is still considerable demand for Asset Based Lending against other assets such as inventory, plant & machinery and property. The market for Factoring continues to decline, although this decline has certainly slowed over the course of this year.

France – Guillaume Baudoux , Crédit Agricole Leasing & Factoring:

In line with our strategy, we have succeeded in boosting our sales to very small companies, especially Créances Services, a new product launched just before the recession, which has been sold to more than 3,500 clients since the beginning of the year. One of its main innovative benefits consists of allowing clients to remit single invoices.

Germany – Stephen Bohner, Eurofactor:

We have not made fundamental changes to our operations and product offering in the last few months. We have started to include export coverage by the German state through Euler Hermes guarantees, known as “Hermes Bürgschaften”, into our export factoring offer.

Spain – Josep Selles, Eurofactor:

The most popular product now is financing sales to the public sector, where suppliers have experienced delayed payment terms. Also, some banks have started to lose their appetite for this business, so clients looking for new lines have a list of new prospects looking for financing facilities. In our case, the percentage of funding devoted to these kind of deals has increased significantly in the past few months. So in a way you could say that this type of business is both gaining and losing popularity at the same time.

Italy – Massimo Mancini, Crédit Agricole Commercial Finance:

In our business, the largest change affected undisclosed factoring, which is now reserved for investment grade clients.

Has there been a noticeable shift in your core client base this year, following the recession?

UK – Ian Flaxman, Crédit Agricole Commercial Finance:

We have made a deliberate strategic decision to focus on larger businesses as this is where there is demand in the UK market with fewer competitors. I do not think that this decision has been a result of the recession and the wider market in the UK is seeing a similar core client base as pre-recession.

France – Guillaume Baudoux , Crédit Agricole Leasing & Factoring:

We have not seen a shift specifically due to the recession, but we are serving more small business clients.

Germany – Stephen Bohner, Eurofactor:

This year, we have been able to constantly gain new clients, of increasingly large size, whilst retaining our existing client base.

Spain – Josep Selles, Eurofactor:

There has been an increase in clients selling to the public sector. The rest consists of much the same profile of clients, but with a notable increase in the volume of companies that work in the automotive sector.

Italy – Massimo Mancini, Crédit Agricole Commercial Finance:

We have not seen much of a change. Businesses are facing the recession with the same close focus and attention as us, but no significant change has been noticeable.

What trends are emerging in the post-recession commercial finance/ factoring market in your area?

UK – Ian Flaxman, Crédit Agricole Commercial Finance:

I cannot currently see any particular trends. The market continues to feel quite stagnant and I believe it will be some months until we will be able to identify new trends.

France – Guillaume Baudoux , Crédit Agricole Leasing & Factoring:

The show must go on as before: strong competition and the need for innovation in terms of product offerings and service.

Germany – Stephen Bohner, Eurofactor:

Larger companies with a non-investment grade rating are still having problems in refinancing directly through the capital market. Structured funding programmes such as Mezzanine or ABS do not seem to have revived. Access to new bank loans, with or without a sufficient rating, remains difficult, especially for smaller companies. Private equity has not seen the same number of deals as before the crisis. One of the rare winners of the crisis seems to be factoring. This is especially due to the fact that companies have learned from the crisis that they need more flexible funding structures. Customised structured finance solutions and syndicated deals seem to be the trend.

Spain – Josep Selles, Eurofactor:

It seems that factoring companies want to try to return to the full factor scheme, avoiding working on credit insurance policies delegation schemes, or not notified, in order to assure the risk of clients.

Italy – Massimo Mancini, Crédit Agricole Commercial Finance:

Paradoxically, there has been a more positive re-evaluation of the product, with a greater perception of the importance of this instrument, as an alternative to banking lines with real added value (invoice management, credit coverage). Also, due to the uncertainty of the markets, the international business has increased its quota in this area.

Has the positive trend in the credit insurance market continued? Is risk appetite still ‘cautiously’ growing?

UK – Ian Flaxman, Crédit Agricole Commercial Finance:

Yes, I think that we are seeing fewer issues with credit insurance appetite than we were this time last year.

France – Guillaume Baudoux , Crédit Agricole Leasing & Factoring:

Credit insurance appetite in France is no less an issue now than it was during the recession.

Germany – Stephen Bohner, Eurofactor:

Credit insurance companies continue to sign more credit limits with a growing risk appetite. The positive trend has strengthened and is also reflected in the increasing turnover of factors.

Spain – Josep Selles, Eurofactor:

Clearly there is a growing appetite here. This may not apply to all of the credit insurance companies to the same extent, however, in general there is an improvement. Also a price war has returned to the credit insurance sector, as a consequence of a big loss of clients during 2008 and 2009, but also because companies are now reluctant to come back to the credit insurance model as they realised that when bad times arrived their protection became empty and also the credit insurance companies used all their knowledge to try to escape from indemnities.

Now they need to grow again, to recover market share, and they are trying to get new clients – often fighting for the same clients, which results in a price war. Sometimes it seems that the lessons of the crisis are easily forgotten.

Italy – Massimo Mancini, Crédit Agricole Commercial Finance:

In this respect, the credit insurance in Italy is not very developed. The market remains almost the same in term of volume, with a decrease in market share of the leader (EHS +/- 40 per cent) and an increase of the challenger (Coface +/- 25 per cent). The risk appetite is growing, confirming the positive trend that started last spring.

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