Equity, hybrid markets could recapitalise Covid-19 hit EU firms
Despite significant support measures implemented by central banks and state governments, there would still be a gap of around €600bn, posing a threat to economic recovery, identified a report by Association for Financial Markets in Europe (AFME) and PwC. French SMEs will need an estimated €220bn to ensure they can recapitalise and stay afloat in the post Covid-19 period.
Merely 10% of European companies have sufficient cash reserves for only six months, even though the government supported the private sector. While the additional debt and government support has enabled the short-term rescue of businesses across Europe, we now need to move beyond short-term bridge financing and focus on the long-term recovery and recovery process, said Adam Farkas, president and CEO of AFME.
The association called on authorities to develop new short-term measures to support European equity and hybrid markets and accelerate the Capital Markets Union to help finance the recovery. Without urgent action, a peak in insolvency could start as early as this month, jeopardising EU’s recovery prospects.
Based on interviews with businesses and private sector investors from across Europe, the report found that many mid-sized companies and SMEs are unwilling to relinquish control of their business, willing to pay a premium for not diluting their voting rights and to distribute a share of profits to investors. “As European businesses struggle to recover from the economic crisis, other types and sources of finance will be needed to help them ease their growing debt burden while allowing them to invest in their future. This is where hybrid and equity markets can play a key role in supporting Europe's recovery,” said Farkas. The new, EU-wide hybrid instruments will be designed specifically for the corporate sector, to meet these needs. These instruments will be compatible with state aid to increase liquidity and could be developed to meet social investment objectives.
The other suggestions include developing existing EU-wide recovery support programs, such as the EIF’s European Guarantee Fund, by adapting to the needs of SMEs, especially smaller enterprises, and recalibrating state aid rules in case of systemic crisis. The financing gap can also be tackled by exploring the possibility of using more innovative instruments, such as dual-class shares to address companies’ supervisory concerns and debt-for-equity swaps to reduce leverage. It is also important to accelerate capital investment measures as a part of the proposed Capital Markets Union, stated the report.