Have the Loan market woes ruined my Aim Xmas presssie?
The reality of the terrible financing situation in the UK for many small and medium sized firms at present is very clear in the markets when you look at volumes and the share prices of the harder to finance smaller firms. The bank loan markets, for so long the source of the majority of funding, have had a terrible year. Indeed, in a little known fact, the volumes are now at the same level as the post-Lehman’s crash.
Many in the financial press compare this to some kind of sporting event, as they focus on the collapse in Debt Capital Markets whilst pointing to the strength of the government bond markets in contrast. However, as usual, they miss the bigger picture. Large companies like Vodafone and Shell can indeed get away bond issues at such attractive levels that their traditional reliance on bank debt funding has fallen away. Also, the dearth of M&A activity has meant that demand for loans is also at record lows. Earlier in the year some big M&A deals really helped Q1 but this has also become somewhat more muted.
The summer was really bad and although a degree of late year rebound has occurred it is not much. Of course Shell and Vodafone and Xstrata are good credits but the secondary and junk markets for bonds are quiet.
What this means is that for all but the big beats, the credit markets for smaller and medium sized company bonds are all but closed and so consequently the demand for debt is very low. So, for an AIM company there are two huge challenges. One is that any financing needs are going to be hard to fill as the companies are not seen as good credits. Secondly, in the alternate, exit routes are via take-out or merger or acquisition. With banks not funding these, or not even being asked to draw up facilities, it suggests that M&A is still off the agenda for some time to come.
This challenge in the loan markets is a big part of why AIM valuations have not caught up with the current FTSE100 rally, in 2010 and 2011 volumes in these markets were back to 2006/7 level. Now they are at 2009 levels – and lo and behold – AIM companies share prices look more like 2009 than 2010.
The bad news is, no one in the City sees a very good year next year and the pick-up in volumes on AIM will likely take a while. So absent some big event changing news, pricing on AIM is going to remain tough.
The upside to this is long-term plays. Good entry levels are now available to these macro trends, and SBM favourites likes Xcite Energy and EMED mining sit at huge discounts to NAV’s. OK, so the markets suggests this will continue absent news, but with good events likely in the next quarter, these companies are still priced to go.
Cityunslicker
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