The OECD’s Small Firm Finance Finagling
The joint industrial and emerging economy OECD issued a gloomy report on post-crisis small enterprise finance through banks and urged broader securities-related availability through asset-backed instruments and exchange IPOs. The Paris-based agency argued that regulatory reform since 2008 has cramped business credit and that official emergency programs left borrowers with increased debt and leverage. Real interest rates have spiked for the sector and start-up companies have been especially shut out. Non-banks and private investors can help plug the gap, and leasing and factoring already popular in Europe can be extended to the developing world. Corporate bonds have been tried by less than 5 percent of firms surveyed with their earnings and size requirements and low ratings entailing steep yields. Mid-cap companies could benefit from a private placement market for sophisticated buyers with easier reporting and related work to modernize secondary trading and insolvency frameworks.
Loan securitization and covered bonds offer potential but the former has been denigrated with the US mortgage security collapse and the latter must still be carried on-balance sheet as an “encumbrance,” according to the organization. Crowd-funding through the internet has attracted money mainly to social and non-profit causes, and rules often do not yet permit equity and fixed-income support through the channel. Hybrids such as mezzanine finance in the middle of the seniority scale have been applied for speculative grade transactions but can depend on government and development institution support. Venture capital is active across the range of OECD members but still has not recovered to pre-crisis levels despite additional tax and training incentives. Public listings through dedicated stock market tiers have not caught on with both demand and supply constraints. Company owners lack the confidence and education for the process and post-offering liquidity is low and micro and macro data are sparse on performance and policy for successful efforts.
The 2015 annual “scorecard” for SMEs based on findings through end-2013 showed a drop in payment delays and uneven bankruptcy record. European non-performing loans spiked, and governments tried to step into the breach with guarantee and equity sponsor schemes. Long-term maturities have been reduced in particular, and interest rate spreads widened relative to bigger firms. Half of credit was collateralized, and rejection rates were 30-50 percent in several emerging market cases. Seed and early stage venture investment remained under 2008 numbers and stock market launches were mixed while leasing growth was a bright spot.
Turkey’s G-20 presidency has emphasized new financing options under its 3Is thrust—implementation, investment and inclusion—heading into the November summit. Deputy Prime Minister Babacan, who may stay in the post although he must leave parliament under the three term limit, has taken steps at home to align debt and share tax treatment and promote private equity. Washington’s chief development finance arm OPIC has pressed Congress for more power to take capital stakes although it still has $10 billion in unused budget authority attributed to lack of personnel. Into the 2016 presidential election advocates have tabled proposal for a combined government-wide entity absorbing AID, Trade and Development Agency and other capabilities to overhaul almost 50-year old quasi-commercial designs.
