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The Impact of Financial Industry
Consolidation
on Access to Short-Term Credit
Table of Contents
Introduction
The Association for Financial Professionals (AFP) and the Capital Markets
Research Center at Georgetown University conducted a survey of AFP members
and other senior-level financial professionals to assess the degree to
which corporate access to short-term credit may be contingent upon the
use of other commercial and investment banking services. The objectives
of the survey were to determine:
- Types and sources of credit used by companies;
- Degree to which companies are requiring commercial and investment
banks to provide short-term credit in order to be awarded other business;
- Degree to which commercial and investment banks are requiring companies
to use other services in order to be provided short-term credit; and
- Perceived impact on companies that do not award other business to
providers of short-term credit.
The survey was administered from November 16 through December 3, 2001,
to senior-level corporate financial professionals (e.g., chief financial
officers, treasurers, vice presidents). A total of 3,562 financial professionals
received surveys via e-mail. 427 survey forms were returned, producing
a response rate of 12 percent. The survey instrument may be found at the
end of this report. (See Appendix A.) Much of the data analysis was performed
by Lorena Droba, Kelly Kirby, and Chris Villar of the Georgetown University
Capital Markets Research Center, under the supervision of Professor David
A. Walker, Director of the Capital Markets Research Center.
Respondents came from both public and private companies in a diverse
range of industries. Thirty three percent of respondents work for companies
with under $250 million in annual revenue. Large companies were also well
represented in the responses, with 11% coming from companies with over
$5 billion in annual revenue. Nearly one quarter of respondents did not
provide revenue data.
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Summary of Results
Sources and Availability of Short-Term Credit
- Lines of credit are used by nearly 80% of respondents, and over 90%
of these companies turn to commercial banks for this form of short-term
credit.
- Availability of lines of credit has decreased for over 33% of respondents
that are currently using them.
- Eighteen percent of users reported increased availability.
- Nearly half reported no change in availability.
- Backup lines of credit for commercial paper are used by about 20%
of respondents, and commercial banks are also the primary source of
this type of short-term credit. Nine of ten companies that use these
facilities rely primarily on commercial banks.
- Forty three percent of respondents using backup lines of credit
for their commercial paper program reported either a severe or moderate
decrease in availability.
- Forty five percent reported that availability was unchanged.
- Only 9% reported an increase in availability.
- Sixteen percent of respondents issue commercial paper, with just over
half of these companies issuing their commercial paper through commercial
banks, and 43% using investment banks. The ability to issue commercial
paper has not been adversely affected during the past twelve months
for most respondents that use this type of short-term credit.
- Availability increased for 15% of respondents that issue commercial
paper
- Another 61% reported that availability was unchanged.
- Only 12% of respondents that issue CP reported a decrease in availability.
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Importance of Short-Term Credit and Company Requirements
- Over three-quarters of respondents indicated that lines of credit
are an important source of short-term liquidity. Asset-backed borrowing
was the second most important source of short-term credit, with over
43% of respondents saying that this is an important source of short-term
credit to their company's overall financing strategy. Most respondents
did not consider euro commercial paper and extendible commercial notes
(ECNs) to be an important source of short-term credit.
- Larger companies place more importance on commercial paper than do
other respondents.
- Commercial paper and associated commercial paper backup facilities
are important to only 19% of respondents.
- Over 60% of respondents from companies with over $5 billion in annual
revenue said that commercial paper and CP backup lines are important
to their companies' financing strategy.
- Commercial paper and CP backup lines are important to one-third
of respondents from companies with $1-5 billion in annual revenue.
- Availability of short-term credit from a provider is an important
factor when awarding commercial and investment banking business.
- Over half of all respondents indicated that a provider's willingness
to offer short-term credit is a "very important" factor when awarding
cash management business, and nearly one quarter said it was "important."
- Over half of all respondents also said that access to short-term
credit is important when awarding debt underwriting business.
- Nearly 30% of respondents indicated that short-term credit access
is important to their selection of an equity underwriter or strategic/mergers
and acquisitions (M&A) advisor.
- Access to short-term credit is a more important factor to large companies
when awarding underwriting and advisory services.
- Almost 80% of respondents from companies with over $5 billion in
annual revenue consider short-term credit an important factor when
selecting a debt underwriter.
- Nearly half of the respondents from these companies reported that
short-term credit is important in their selection of an equity underwriter
or strategic/M&A advisor.
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The Relationship between Short-Term Credit and the Use of Other
Services
- Half of all respondents indicated that they are "required" or "strongly
encouraged" to use cash management services from commercial banks in
order to be granted short-term credit, while only 9% reported being
"required" or "strongly encouraged" to do so by their investment banks.
- Over one-quarter of respondents are "required" or "strongly encouraged"
to use the debt underwriting services of their commercial banks that
provide short-term credit, while a slightly smaller number (19%) reported
being urged to do so by their investment banks.
- Sixteen percent of respondents were "required" or "strongly encouraged"
to use the equity underwriting or strategic/M&A advisory services
of their investment banks that provide short-term credit, and fewer
than 12% of respondents were urged to do so by their commercial banks.
- Larger companies are more likely to be urged by both commercial and
investment banks to use underwriting and advisory services as a condition
of being granted short-term credit.
- Nearly 60% of these companies were "required" or "strongly encouraged"
to use the debt underwriting services of their commercial bank credit
providers, with over 40% being urged to do so by their investment
banks.
- Forty percent of these larger companies were "required" or "strongly
encouraged" by their investment banks to use their strategic/M&A
advisory services, while only 27% were urged to do so by their commercial
banks.
- One-third of these companies responded that they are urged to use
the equity underwriting services of their investment banks, compared
to 24% by commercial banks.
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Relationship between Access to Short-Term Credit, the Use of Other
Services, and Provider Selection
- Many companies expect adverse consequences from not awarding business
to short-term credit providers.
- Nearly half (48%) of the companies responding expect that the amount
of short-term credit they would be offered would be reduced if they
were to choose not to award other business to short-term credit providers.
- Thirty nine percent expect that they would be offered no credit
if they did not award other business to providers of short-term credit.
- Over 40% also expect that they would be charged a higher rate for
the credit offered.
- Companies with over $1 billion in annual revenue are even more likely
to expect a reduction or withdrawal of short-term credit if they did
not award other types of business.
- Approximately 70% of these companies expect that the amount of credit
offered would be reduced.
- Sixty percent reported that those providers that were not awarded
other business would probably not grant them any credit.
- Over 30% of all respondents indicated that they would be "unlikely"
to select a short-term credit provider that required that the company
use other services, while only 16% reported that they would be "likely"
to do so. Forty nine percent of respondents indicated that they would
be "somewhat likely" to use a short-term credit provider that required
them to use other services, indicating some uncertainty on the part
of respondents.
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Findings
Use and Sources of Short-Term Credit
Commercial banks are the primary source of the short-term credit instruments
most commonly used by respondents. Results indicate that 77% of respondents
use lines of credit for short-term financing and that, of those, 92% obtain
this credit from commercial banks. (See Figure 2.) Approximately one of
five respondents (18%) uses commercial paper backup facilities and, of
those, 90% obtain this credit from commercial banks. Sixteen percent of
respondents use commercial paper as a source of short-term credit, with
51% of those using commercial banks and 43% using investment banks to
issue their commercial paper.
The largest companies (more than $5 billion in annual revenue) were much
more likely to issue commercial paper than was the average respondent.
Sixty percent of respondents from companies with more than $5 billion
in annual revenue issue commercial paper and use backup lines of credit,
and over 30% of companies with $1-5 billion in annual revenue use these
instruments.
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Availability of Short-Term Credit
Access to lines of credit, the most common form of short-term credit
used by respondents, has decreased during the past twelve months for over
33% of respondents that are currently using lines of credit, with only
18% of users reporting increased availability. (See Figure 3.) Nearly
half reported no change in availability.
Forty three percent of all respondents that use backup lines of credit
for commercial paper report either a severe or moderate decrease in availability
over this period, and an almost equal percentage reported no change in
availability. Only 9% of respondents reported an increase in availability
of backup lines of credit.
Access to short-term credit through the commercial paper market was either
unchanged (61%) or increased (15%) for nearly three-quarters of respondents
that issue CP. Availability of credit through the CP market decreased
for only 12% of respondents that issue CP.
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Importance of Short-Term Credit Instruments
Results indicate that lines of credit are the most important form of
short-term financing for companies, with 77% of respondents classifying
credit lines as either "very important" or "important". (See Figure 4.)
Asset-backed borrowing is also cited as a "very important" or "important"
source of short-term credit by 43% of respondents. The majority of respondents
considers commercial paper, commercial paper backup facilities, euro commercial
paper, and extendible commercial notes (ECNs) relatively unimportant.
Overall, less than 20% of all respondents indicated that commercial paper
and CP backup lines of credit were "very important" or "important." However,
they are an important source of credit to larger companies. Over 62% of
respondents from companies with over $5 billion in annual revenue indicated
that commercial paper and CP backup lines of credit are "very important"
or "important " to their companies' overall financing strategy. In addition,
over one-third of respondents from companies with $1-5 billion in annual
revenue considered these instruments to be "very important" or "important."
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Importance of Providing Short-Term Credit
Respondents consider a provider's willingness and ability to offer short-term
credit to be a significant factor when awarding cash management and debt
underwriting business. (See Figure 5.) Eighty percent of respondents classify
the availability of short-term credit as either "very important" or "important"
in selecting cash management banking relationships. Furthermore, over
half of all respondents view credit provision as a determining (very important"
or "important") factor in their selection of a debt underwriter. Access
to short-term credit is much less important when selecting an equity underwriter
or strategic/mergers and acquisitions (M&A) advisor. Less than 30%
of all respondents view short-term credit as either "very important" or
"important" when selecting a provider of these services.
Larger companies place more importance on the availability of short-term
credit when selecting providers of underwriting and advisory services.
Nearly 80% of respondents from companies with over $5 billion in annual
revenue indicated that access to short-term credit is a deciding factor
("very important" or "important") when selecting a debt underwriter. Almost
half of the respondents from companies with annual revenues over $5 billion
consider the availability of short-term credit to be "very important"
or "important" when selecting an equity underwriter or strategic/M&A
advisor.
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Commercial Banks: Relationship
Between Access to Short-Term Credit and the Use of Other Services
Commercial banks actively cross-sell cash management services when discussing
short-term credit with companies. Seventeen percent of all respondents
indicate that their commercial banks require them to purchase cash management
services in order to be offered short-term credit, with another 33% responding
that they are "strongly encouraged" to do so. (See Figure 6.)
Cross-selling is occurring for other lines of business as well, but not
as strongly. Six percent of respondents are "required" to award debt underwriting
business to their commercial bank credit providers, with another 21% being
"strongly encouraged" to do so. One of ten respondents reported that they
are "strongly encouraged" to use the equity underwriting and strategic/M&A
advisory services of their commercial banks in order to be granted short-term
credit, but less than 2% responded that this is "required".
Even when commercial banks are not requiring or strongly encouraging
respondents to use other services as a condition of short-term credit,
cross-selling is still taking place. About 20% of respondents reported
being "encouraged" to use other services, even if they were not "required"
or "strongly encouraged" to do so.
Companies with over $5 billion in annual revenue are much more likely
to be "required" or "strongly encouraged" to use the underwriting and
advisory services of their commercial banks in order to access short-term
credit. Nearly 9% of these respondents are "required" to use debt underwriting
services, with another 49% being "strongly encouraged". Nearly one-quarter
of respondents from companies with over $5 billion in annual revenue are
"strongly encouraged" to use equity underwriting and strategic advisory
services, but none reported being "required" to do so.
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Investment Banks: Relationship
Between Access to Short-Term Credit and the Use of Other Sercies
Respondents indicated that they are also being urged by their investment
banks to use other services in exchange for credit access. (See Figure
7.) Six percent of respondents indicate that they are "required" to use
their investment bank's debt underwriting services in order to be offered
short-term credit, while 13% are "strongly encouraged" to use this service.
Six percent of respondents are also "required" to use their investment
bank's equity underwriting services, while 10% are "strongly encouraged"
to do so in order to access short-term credit. Only 4% of respondents
are "required" to use the strategic/M&A advisory services of their
investment bank, and 12% are "strongly encouraged" to use this service.
Less than 3% of respondents reported being "required" to use cash management
services from their investment bank, with under 6% being "strongly encouraged"
to do so.
Companies that are not being "required" or "strongly encouraged" to purchase
cash management, underwriting, or advisory services are not being actively
cross-sold those services by investment banks. Fewer than 10% of respondents
are being "encouraged" to purchase these services.
Large companies were the most likely to be urged to purchase other services
as a condition for being granted short-term credit. Over 40% of companies
with over $5 billion in annual revenue reported being "required" or "strongly
encouraged" to use the debt underwriting and strategic/M&A advisory
services of their investment banks in order to access short-term credit.
About one of three of these respondents is "required" or "strongly encouraged"
to use the equity underwriting services of their investment banks.
Impact on Credit of Not Awarding Other Business
Almost half (48%) of all respondents feel that if they did not award
other business to short-term lenders, the amount of short-term credit
provided would be reduced. (See Figure 8.) Roughly two of five respondents
anticipate that no future credit would be provided by those institutions
(39%) or that that they would still have access to short-term credit through
those institutions, but that it would be at a higher rate (41%). Less
than one of five respondents (19%) feels that there would be no change
in the credit relationship from the decision not to award other business
to their short-term credit providers.
About 70% of larger companies - those with annual revenue of over $1
billion - expect that they will have access to a reduced amount of credit
if they were to decide not to award other business to their credit providers.
Moreover, about 60% of companies with over $1 billion in annual revenue
expect that this decision would cause credit providers that were not awarded
other business to no longer offer any short-term credit.
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Likelihood of Selecting a Provider That Requires Other Services
Nearly half (49%) of respondents indicate that they would be "somewhat
likely" to select a short-term credit provider that required that they
use other services, indicating some degree of uncertainty on their part.
However, over 31% responded that they would be "unlikely" to select a
short-term credit provider if that provider required that they use other
services, while only 16% indicated that they would be "likely" to select
a provider that imposed this requirement.
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