“The degree of priority that public policy should have does not match the instruments that are available to support business scaling, in addition to the fact that there is a refractory business culture to address consolidation processes within companies”. “I notice that there is a great retraction to capital operations, more semi-capital operations are preferred than capitalization operations. I think it has to do with something that didn't go well with the exit of some of the funds that entered the companies. Entrepreneurs are very resistant to capitalization. In addition to this distrust, I am beginning to notice that there is a lot of appetite for carrying out these operations in the non-tradable sector and I don't know if this will be the priority of the Portuguese economy”. It was with these words that José Eduardo Carvalho opened the seminar “The fundamental challenges of corporate capitalization and financing”, organized by AIP on March 28, in Lisbon.
The president of AIP also expressed the wish that, after the consolidation of Banco de Fomento, “intervention takes place in areas where commercial banking responds little or poorly, such as high maturity loans, capitalization and internationalization”.
The creation of pooled bond loans and new financial and tax incentives for capitalization
During the session, Marta Carvalho, from PwC, presented the study 'New instruments for the capitalization and financing of companies - the creation of grouped bond loans and new financial and tax incentives for capitalization'. This AIP study has two aspects: the first consists of a proposal for the creation of financial and tax instruments to boost business resizing initiatives to support Merger & Acquisition operations. The other defines a pooled bond issuance model for SMEs.
With regard to the first, the proposal aims, using financial and tax incentives, to encourage the growth and expansion of national SMEs that support their training and acquisition strategies, making the process of raising capital or merger or acquisition less costly for SMEs, reducing barriers to resizing. The implementation of this measure will involve subsidies in the training phase of companies, community contributions and funding for mergers and acquisitions, and finally, tax credits granted to the companies involved.
It is aimed at SMEs established or operating in Portugal, economically viable, of any nature and under any legal form, that propose to develop inorganic growth projects, with strong growth potential, with a strategic rationale and value creation in the national economy. It points to target sectors that have export capacity or where there is potential to promote it.
It includes capital strengthening operations (acquisition of shares in companies or increase of shareholdings in existing companies or companies to be constituted) and merger or acquisition processes.
The second aspect of the study, on grouped issuance of SME bonds, aims to strengthen economically viable SME, with growth and innovation potential, with special focus on exporting companies; fill in the market failure with regard to access to financial instruments by companies that develop activity in the national territory; and also make available a set of diversified portfolios of companies to institutional investors, which generally do not target SMEs and their respective securities issues, due to their reduced size. On the other hand, it helps to ensure that SMEs have sufficient liquidity to support their growth, through adequate financing of their needs.
The group issue of bonds consists of a model in which a certain group of SMEs issue bonds, creating, for this purpose, a bond fund in the amount of the set of bonds issued by the various companies. This model allows bond issues to gain sufficient size to potentially attract investor interest.
The grouping of bonds issued by SMEs is an alternative financing instrument with benefits for companies, namely for smaller ones that have more limitations on access to funding sources. This form of financing represents a reduction in costs compared to other sources of financing. The diversification and lower risk obtained by grouping the issues of several companies make it possible to reduce the cost of financing. The standardized issuance process also allows for a reduction in charges. Additionally, this mechanism also provides advantages for investors, such as the possibility of investing in a group of companies that did not have or had more difficult access to the capital market.
At the round table that was part of the seminar, Isabel Ucha, from Euronext, presented the advantages of the Elite project, which gives “more opportunities to Portuguese companies to grow and finance themselves, perhaps in a different way than it has done until today. It is a business accelerator and the objective is to support companies to grow. We will launch the first product in June, with 15 to 20 companies” and he referred that Euronext “is working to help or encourage the assembly of grouped bonds”.
Tiago Simões de Almeida, from Banco Português de Fomento said that “the refractory culture of entrepreneurs has to do with a lack of financial literacy and that, in this regard, BPF decided to launch a road show that involves bringing together entrepreneurs, in collaboration with business associations, in 10 district capitals, where we will try to show the different offer we are going to have and the advantages of quasi-capital instruments”. Tiago Simões de Almeida also announced that “a new financing line will be launched in the first half of the year, which will fully replace and with better structural conditions the business succession line that existed before, the ADN 2018”. “This line works as an anchor product of the national mutual guarantee system, has multiple products, can be factoring, investment, working capital, tax increase and business succession, technical guarantees for works contracts, among others”, he added.
Gonçalo Regalado, from Millennium bcp, defined four types of companies where the bank focuses on “SMEs that make the country move forward, PME Líder, those that invest with European funds from PT 2020, PT 2030 and PRR, and that focus on productive innovation, internationalization and innovation associated with research and technological development, the exporting and importing companies. Companies that invest, internationalize and innovate will always have a safe haven at Millennium bcp”. He also stated that he had already proposed to AIP “that we managed to join companies by ranks, cork, molds, textiles, plastics, agro-industrial, so that with the international rating of one of the four agencies we could make the grouped obligations with the guarantee of Banco Português EIF or EIB European guarantee. We will be available to issue the transaction and provide technical support to each of the companies participating in the grouped issue process. This could give us the conditions and capacity for companies to continue to finance themselves at competitive prices”. Gonçalo Regalado also added that “Millennium bcp has more than 200 thousand business customers, but with credit it only has 44 thousand. There are 156,000 companies that neither have credit nor want it”.
For his part, Franquelim Alves, from Europartners, warned of the size of national companies: “European programs, in general, encourage the creation of SMEs, which is legitimate in terms of innovation, and are very contrary to processes of business consolidation. If we look at the incentives, in general, they are not favorable to business consolidation, on the contrary. But we have a dimension problem that is unique. While the French, the Spanish, the Italians have big companies and therefore encourage SMEs to fight the dominant position of big companies, we have less and less big companies. In the industrial sector we have few and the ones we have have been successful, but they have a significant challenge in international markets. 30% of Portuguese companies do not release operational cash flow to pay interest. Our problem is not more debt, it's more capital. Portuguese companies have a problem of financial anemia. Either equity or convertible bonds. It has to be something that gives companies time to gain size and scale to compete”. And he argued that “clustering solutions make perfect sense. Solutions that make it possible to mobilize funding to transfer to companies, eliminating size restrictions are useful”. “Anything that is factors of positive discrimination and gain in size to go to the market to finance themselves makes perfect sense. That's where you have to go," he concluded.