A Storm Passes—Now, For A Recovery

From scandal to pandemic, Austria’s economy has had a long year.

Last summer, a financial scandal threatened to upend the rock-solid foundations of Austrian corporate finance. Authorities discovered that Martin Pucher, CEO of Commerzialbank Mattersburg, a regional bank in an eastern state, had been systematically falsifying the bank’s accounts for more than a decade. Over half the bank’s declared assets were pure fiction, and companies and cooperatives may lose over €100 million ($122 million) in uninsured deposits. Commerzialbank’s fall came after the closure of another significant player, Anglo Austrian AAB Bank, in a flurry of money-laundering allegations.

Banks are the principal source of external funding for Austrian corporates, in line with other EU countries, including Germany. Yet when the dust settled, treasurers could exhale a sigh of relief; funding conditions for corporates in the Alpine nation were not impacted, and lending rates continued their long march to ever-lower levels.

All the work banks had undertaken over the prior decade to improve levels of capitalization, profitability and resilience had paid off, it seemed. “As opposed to the financial crisis in 2008 and 2009, the financial sector is currently part of the solution rather than part of the problem,” says Peter Unger, head of corporate finance solutions at Raiffeisen Bank International (RBI) in Vienna.

Corporates, too, went into this year’s crisis with much stronger balance sheets than in past crises. “Austrian companies, especially the larger ones, really made good use of the favorable funding conditions,” Unger says, and “built up financial cushions to deal with the current liquidity pressures.” Oesterreichische Nationalbank, Austria’s central bank, reports that last March, corporate deposits were twice the size they had reached before the 2008 financial crisis.

Signs of Life

Austria’s investment bankers face another challenge now, however: finding a role in the nation’s recovery from a pandemic-induced economic slump that seems sure to last a solid year before it abates.

Austrian companies get the lion’s share of their external funding via long-term debt, almost exclusively from domestic sources. According to S&P Global, the debt of nonfinancial corporates surpassed 100% of GDP in 2019—far ahead of the 60%-70% range more typical of Austria’s larger euro-area peers.

When the pandemic arrived, short-term corporate loan demand actually surged briefly as companies worried about financing for inventories and working capital. Conditions improved, thanks to an extensive web of government support amounting to as much as 13% of GDP. Much of the stimulus is designed to benefit companies directly. Those most affected by the pandemic will be in tourism, hospitality and the wholesale and retail trade sectors, which are dominated by small to midsized enterprises (SMEs).

“In a year characterized by pandemic-related uncertainties, corporate treasurers in Austria have concentrated their funding on bilateral and syndicated bank loans,” says Hans-Werner Grunow, managing director of corporate finance consultancy Capmarcon. “But bond issuance has also perked up.”

The bond market remains a reliable source of funds for Austrian corporates, however, both small and large. SMEs dominate the corporate landscape and are typically too small to issue tradable debt. Large companies typically look to markets abroad, says Thomas Gehrig, Professor of Finance at the University of Vienna. “Blue chip companies can find more liquidity and a larger investor base abroad, which keeps bond issues in Vienna in short supply,” he says.

Austrian companies are among the most prolific issuers of so-called Schuldscheine, or promissory notes, a form of private debt typically held to maturity and not traded. Unrated smaller companies occupy this market; banks are the most important investors, including, increasingly, foreign institutions.

The economic crisis has put a crimp in this expanding market, however. “After four record years in a row, Schuldscheine issuance will be down by about a quarter in 2020,” says Michael Bures, head of debt capital markets, corporates, at RBI. “Thanks to the unprecedented flooding of the market with liquidity and bond buying by the European Central Bank, many corporates in the investment-grade range find even more attractive funding options in outright bond issuance.”

A Green Wave

Another promising frontier for Austrian corporates and their bankers is sustainable finance. “In approximately two-thirds of our client meetings, we now discuss green finance,” says Bures. “We’re going to clients with the topic, and they are also explicitly demanding it.”

Until last year, Austria was a relative laggard in this field; but that’s changing, says Gehrig. With a doubling of demand for green and ethical investments in 2020, he expects the supply of green bonds to follow suit. “This trend will only gain speed in coming years,” Gehrig says. “Austrian companies are nowhere near exploiting that fast-growing segment, even if Austrian investors have long shown an interest.”

Until 2018, only two private issuers had ventured into the green bond market, a fraction compared to the similarly sized Netherlands. Then in 2019, green and sustainable issuance took off in Austria as conditions emerged for sustainable corporate bonds to outprice their conventional cousins. The government is now preparing a comprehensive Green Finance Agenda, which could give a further boost to this segment.

One place not likely to generate greater corporate finance activity is Austria’s equity market, close observers say. Market valuation is only around 5% of GDP and the ATX equity index remains more than 25% below its all-time early 2018 high, lagging significantly behind other European indexes. Equity finance is not a popular option in Austria, in part due to the primary ownership structure of most companies. SMEs, the so-called Mittelstand, are a mainstay of Austria’s corporate landscape; and they are often family owned. Typically, these companies are too small for liquid rights issuance and their owners can be reluctant to dilute their stakes and shoulder more exacting disclosure obligations.

For this reason, initial public offerings have been few and far between; mergers and acquisitions also have been less than vibrant. In the last three years, only 80 deals have closed, with a median deal value of less than €70 million ($85 million)—and the largest segment was real estate.

For banks and large investors, that leaves the debt market. Even though domestic banks are likely to remain the principal funding source for Austrian corporates, new long-term borrowing may remain subdued, Unger says. As long as pandemic-related uncertainty lingers, he argues, most companies will stick to a wait-and-see approach and hold off on new investments and the corresponding loan funding.

Longer term, the outlook may be brighter. Fixed-income securities markets, including Schuldscheine and green bonds, show growing promise; and banks are eager to lend to reduce their rapidly rising excess liquidity, which weighs down profitability.

“Every company with half-decent prospects will for the foreseeable future have no problem attracting all the funding it needs,” Bures predicts.