Despite the numerous uncertainties in today’s economy, most companies still require external, often specifically debt financing to sustain their growth strategy. Among the multitude of options available for acquiring credit, undoubtedly the most popular are loans, yet given the right financial, M&A, tax, or legal expertise, entrepreneurs may find other alternatives better suit their company’s specific needs or preferences. Let’s take a look at a couple of the possible choices available for companies in 2024.
The Traditional Form Of Debt Financing – Bank Loans
In a previous entry we had already discussed the challenges of acquiring loans from banks in 2022 (for the English translated, abbreviated version of our post see: „The Széchenyi Credit Card programs have just been launched”). In the same year due to the extraordinary raises of interest rates, interests on HUF denominated loans also rose to 17.99%, while interests on EUR denominated loans rose to 3.49%. At the same time, uncertainty and the fear of a recession lead to a decrease in the amount of investment-purpose loans being taken on, marked by a decline in the risk appetite of both corporate and banking entities.
Source: Hungarian National Bank: Trends in Lending report
Despite the decline in lending transactions, corporate loans outsanding have shown an annual growth rate of 11 percent between the 2nd quarter of 2022 and the same quarter of 2023, fueled mainly by the expansion of large corporate foreign currency loans.
In response to the economical downturn, the Hungarian Government initiated new coporate loan incentive programmes (the Széchenyi Card Programme MAX+ and the Baross Gábor Reindustrialisation Loan Programme initiated in February 2023).
The programmes aim to help domestic SME and large corporate players struggling with the energy crisis and the disruption of international value chains by providing access to favourable working capital loans, investment loans or green investment loans. Depending on the purpose of the financing, borrowers can expect a maximum fixed annual interest rate of 3% or 8% for EUR loans, and 5% or 12% for HUF loans.
Financing SMEs through the issuance of corporate bonds
In contrast to traditional bank lending, corporate borrowing may also take place on a capital market basis: one viable option is the issuance of corporate bonds. From the point of view of corporations, bond issuing allows for capital to be raised from a wide base of investors (including institutional investors) while allowing for a greater flexibility in repayment and other issuance terms. In turn, many capital market investors, institutional or otherwise, prefer the predictability of bond interest payments compared to the conditional nature of payments to equity.
Companies compete over a wide spectrum of different risk-rated investors to secure finance from capital markets. To gain an advantage over competitors, some companies offer unique financial solutions for potential investors.
One such solution is issuing interest-bearing shares, which offer fixed payments similar to bonds, but also give the holders of these securities certain ownership rights, unlike corporate bonds.
Interest-bearing shares often prove quite attractive for investors, as they provide a fixed yield above government bonds, beyond which, in the event of additional dividend payments, the yield can only increase. The predictability of these dividend payments can be a particularly attractive aspect of these securities for both the issuing company and its investors, similar to corporate bonds.
Amongst the supply of unique, hybrid products are convertible bonds, which also contain features common to both shares and bonds. A convertible bond is a bond that the holder can convert into a predetermined number of shares on specified maturity dates, subject to certain conditions being met. Many investors find the possibility of surplus yields beyond those available on „simple” bonds especially attractive, while together with the issuers, the long-term nature of these bonds comply with longer-term growth strategies too.
In addition, if investors convert their bonds into shares, the repayment obligations of the issuing-company are eliminated, as the bond being converted into shares means debt turns into equity while existing ownership is diluted.
Because of the risk of dilution, issuing new securities isn’t alway the best option for a company. Instead, companies can turn to banks to cover their new funding with marketable securities instead of their other valuable assets – that is, the company can choose to take out a Lombard loan. Bank deposits, government bond and equities are all accepted by banks as collateral on a case-by-case basis. The terms for these loans are usually free purpose, short-term funding, with interests comparable to those of personal loans. Albeit not a cheap solution, often costly property valuations and more valuable forms of collateral may be replaced as an advantage.