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IPE special report May 2018

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Standard & Poor's launches mid-market credit initiative

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  • Standard & Poor's launches mid-market credit initiative

EUROPE – Standard & Poor's Ratings Services has launched a new product aimed at giving credit investors their first foothold in the opaque but fast-evolving market for the debt of Europe's medium-sized companies – which account for around one-third of the region's economy and employment.

'Mid-Market Evaluation' will target companies with revenues below €1.5bn and debt below €500m, a sector finding it increasingly difficult to finance itself with Europe's de-leveraging banks and more reliant on the capital markets.

It is an independent opinion about the creditworthiness of a mid-market nonfinancial company relative to other nonfinancial mid-market companies, paid for by the borrower and distributed privately to institutions chosen by the borrower and its advisers.

Alongside a credit report, the Evaluation will include a grading from MM1, the highest, to MM8 and MMD (for 'default') – although, as a private assessment, this will not have the same regulatory status as a credit rating and cannot be used by the borrower to issue in the public debt markets.

Based on Standard & Poor's corporate credit rating methodology, the analytical process is simplified and adjusted for mid-market companies.  

It is not applicable to financial firms, utilities, leveraged buyouts, project finance, subsidiaries or holding companies of a rated entity, or to mid-market companies that issue publicly traded bonds.  

Roberto Rivero, S&P's head of market development for the EMEA, said: "After meeting with more than 250 organisations – mostly mid-sized companies, institutional investors active in the space and intermediaries – almost unanimously the feedback was that it would help the mid-market access capital and grow if we were to develop a product specifically for that market.

"Much of the feedback suggested the key thing for investors would not be the scale itself but rather the research we will bring along with it.

"The intermediaries in this space say they have never been so busy, so a report summarising the key credit risks would be a helpful filter for deciding whether something is worthy of further attention or not."

S&P estimates European medium-sized businesses will need to raise as much as €3.5trn in debt funding over the next five years, about €2.7trn of which relates to refinancing existing loans, with the remainder needed to support capital investment and expansion plans between now and 2018.

This equates to about one-third of total debt currently owed by non-financial companies in the region, the agency reckoned.

Colin Tyler, chief executive of the Association of Corporate Treasurers, said: "Large companies have been raising significant amounts of new funding in the international bond markets, but this has been more difficult for mid-sized companies where smaller issue sizes and lack of clarity on credit risk have discouraged investors."

A number of European pension funds have become more involved in direct lending to smaller companies over recent years, and initiatives such as the European Commission's Green Paper on the long-term financing of Europe's economy have also sought to find solutions to the lack of bank funding in the region.

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