Somewhat delayed in both timing and degree relative to the United States, capital constraints are now having an impact on pricing in the European credit markets.
Moreover, treasurers and finance directors of large Europeans corporations expect that margin will continue to widen from current levels over time.
Recent information gathered from a wide range of large companies in the United Kingdom and among the top tier of corporations across continental European markets (including the Nordic region) shows that margins could be expected to rise a further 1/8 0/0 from current levels if international credit facilities now in place were to be renegotiated during 1993.
Specifically, respondents that have international term credit facilities -- either drawn or standby, with an original maturity of four to seven years -- were asked just what the all-in cost on these facilities would be if drawn (lending margin, plus facility and agency fees, plus front-end fees), expressed as an average blended margin per year over the London interbank offered rate or its equivalent.
They also provided the same information based on an estimate of what these costs would have been two years before and if the underlying facilities were to be renegotiated over the 12 months following the interview periods, which were December-February 1991-92 and 1992-93. The evidence is striking.
Continuing Pressure Seen
With information drawn from more than 250 of the large British companies that we investigated, all-in margins are estimated to have risen from just under 30 basis points in 1989-90 to over 50 basis points today.
Moreover, treasurers in Britain foresee continuing upward pressure on margins -- to 66 basis points -- should facilities now in place be renegotiated over the next year.
And, if the past is any indication, these projections are impressive in terms of their accuracy, with the anticipated margins of one year ago within 3 basis points of those actually realized.
Similarly, information drawn from over 150 of the largest corporations across continental Europe indicates that all-in margins have risen from roughly 20 basis points in 1989-90 to almost 35 basis points today, with a further rise to almost 50 basis points expected if facilities now in place are renegotiated in the year ahead.
It'a a Seller's Market Now
While these margins alone still do not provide adequate risk-adjusted returns on capital for the banking industry as a whole, they do represent a significant shift away from the almost unrivaled "borrower's market" that prevailed during most of the past decade.
They also incorporate a progressive differentiation in risk assessment as lenders become more discriminating about individual credits and potential exposure to country risks -- both conditions conspicuously lacking during the latter stages of the 1980's boom.
Illustrating this phenomenon is a comparison drawn from our surveys of the large corporate markets in Germany (still Europe's dominant economy despite the onset of recession) and the four Nordic markets (where economic conditions are at their lowest ebb in roughly 50 years).
Just two years ago, all-in margins separating the two areas were estimated to be less than 1/8 0/0, whereas today the differential is some 30 basis points.
Nordics Expect Big Jump
Moreover, while finance directors in Germany (whose companies access the Euromarkets) would also expect margins to rise, those in the Nordic markets anticipate a further substantial jump in all-in margins.
Although banks may be heartened by these trends, the harsh reality is that these margins are still not sufficient to justify substantial "investment" in most companies, when adjusted for capital requirements and risk (absent other collateral pieces of business); and marginal returns on lending to large corporations in Germany and some other continental European markets still lag behind those possible in a number of other economies.
Equally problematic is that a steady rise in lending margins will continue to motivate the highest-quality corporations to abandon banks in favor of securities markets and other institutional investors -- much as has happened in the United States.
Trend Could Continue
Indeed, this trend could well gain momentum as long as capital requirements continue to prejudice against high-quality corporate borrowers/issuers, first by favoring sovereigns, para-statals, and financial institutions, and second, by failing to differentiate among different qualities of corporate credit.
While corporate access to public securities markets in Europe is still somewhat limited, dwarfed by the heavy issuance of sovereign and other big-ticket issuers, this situation can be expected to change over times as investors develop an appetite for often less liquid, but more remunerative, corporate transactions.
At the same time, recent evidence from some highly visible (and aggressively priced) transactions for quality borrowers in syndicated credit markets might suggest that greater differentiation may ultimately be forced on lenders (despite uniform capital standards for corporations) by the large pool of untapped credit capacity built up during years of simultaneous recession in a number of major economies.
Even so, these deals do not necessarily reflect broader currents in the market or the growing number of bilateral arrangements negotiated outside the public arena.
Top-Tier Differential Stable
For example, the margin differential separating top-tier corporates in the United Kingdom from those with revenues of 500 million to 1.4 billion pounds has remained fairly stable over the past several years.
In fact, it is only for those companies with revenues below 500 million pounds where one finds that premiums for risk have been materially expanded in recent years.
As confirmed elsewhere in our examinations of continental European and U.K. markets, these conditions should continue to favor those financial institutions with strong capital positions and the capacity to service clients in both the credit and the capital markets.
Whether these developments were the intended outcome of the Basel guidelines for capital adequacy is at this stage probably a moot point.
Even so, as with most attempts at financial market regulation, it is perhaps appropriate at this time to reexamine some basic precepts to ensure that these constraints on capital and credit are in fact producing desired -- and desirable -- results.
Mr. Schantz is a principal of Greenwich Associates, a consulting firm in Greenwich, Conn.