Download US subprime credit crisis and its implications from a corporate

US subprime credit crisis and its
implications from a corporate financing
point of view
Thilo Kusch, Chief Financial Officer
15th CEO Summit Röjtökmuzsaj
24 April, 2008
US subprime credit crisis – how we got there?
Economic Environment
Reaction of financial
institutions
 Low interest rates
 Property bubble
 Deterioration of financing standards
Excessive financing – search for yield
 Sluggish regulation
 Financial innovation
Spreading risks via securitization where the
 Lack of transparency
original risk can not be seen
 Burst of property bubble
Tightening credit conditions
Problems in fulfilling subprime mortgage
obligations
US subprime credit crisis and its implications from a corporate financing point of view
Thilo Kusch
24 April, 2008
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US subprime crisis and its spreading in the global
financial system
Problems in fulfilling subprime mortgage obligations
Losses of financial intermediaries and investors
Reassessing risks, and risk-taking (banks, funds, investors)
Increase in counter-party risk, losses of confidence
Cost of financing
has increased
Financing
possibilities have
narrowed
Impact on financial markets and real
US subprime credit crisis and its implications from a corporate financing point of view
economy
Thilo Kusch
24 April, 2008
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Effect on the Capital markets
Harder to raise financing both on equity and debt markets: public transactions (IPO,
bond issuance) are delayed, because of increased costs and low demand of
securities
 Global debt issuance collapsed in first quarter 2008
 In Q1 2008 the number of abandoned IPO’s jumped
Investors are strongly selective, but the demand for good quality assets and
transactions may even increase: Visa IPO in February 2008 was the USA’s
greatest IPO ever, 40% surge in equity price following the official listing on NYSE
US subprime credit crisis and its implications from a corporate financing point of view
Thilo Kusch
24 April, 2008
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Impact in the CEE region and Hungary
CEE banks did not have significant exposure to US subprime credit market
Risk appetite of investors deteriorated: investors partially moved to safe markets from the region
Asset prices came under pressure
Due to weaker macro-fiscal conditions, heavier equilibrium problems and unstable business environment,
Hungary is deeper affected by the financial turmoil than its regional peer-group
Overview of the financing environment in Hungary
Due to the weak financing capacities of the domestic sectors, the country is strongly exposed to foreign
financing
Unfavorable global environment
Unfavorable local environment: HUF interest rates increase significantly
Implication: economic actors who have financing needs, it is more costly to get to funds from the debt market
US subprime credit crisis and its implications from a corporate financing point of view
Thilo Kusch
24 April, 2008
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Possible reactions to reduce risks for companies
 Restructuring the loan portfolio:
 Shorten the maturity
 Raise the share of FX loans
 Raise the share of loans with
floating interest rate
 Cash pooling – optimising the cash
balances of group companies
 Enhancing the working capital
management
Modifies the risk-taking of a company
Possible advantages depend on the current
status of efficiency
No superior ‘after-crisis solution’ exists.
The negative effects of a similar turmoil can be
alleviated most efficiently by prudent risk
management, well before the emergence of such
a credit crunch.
US subprime credit crisis and its implications from a corporate financing point of view
Thilo Kusch
24 April, 2008
Page 6
Capital structure of Magyar Telekom
 The company’s strategic priority remains finding further value-creating acquisitions, require a
flexible balance sheet
net debt ratio in the range of 30-40%
 Magyar Telekom shares are listed both on BSE and NYSE
 The net debt ratio 31% EoY 2007
HUF 367 bn)
significant debt portfolio (total debt of
 Financing need of Magyar Telekom arises in connection with
 the annual dividend payment (HUF 80.2 bn in 2008)
 maturing components of the loan portfolio

decreased by MT Group’s strong cash generation
US subprime credit crisis and its implications from a corporate financing point of view
Thilo Kusch
24 April, 2008
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Effects on the financing of Magyar Telekom
Bank loans and financing from the international markets has became more expensive
The following financing characteristics could help lessen the effects:
available shelf facilities in sufficient amount
loan portfolio with longer maturity/maturities spread over time
only a part of the debt needs to be renewed under the unfavourable (and possible
temporary) circumstances
significant portion of the debt portfolio in debt instruments bearing fix interest
diversified financing sources
the turmoil might affect various creditors and
investors differently
market push on dividend payment
more difficult to move towards the
optimal capital structure under the changed circumstances
Continuous risk management in the past is paying back now,
it could decrease the effect of the credit crunch in short or
even in medium run.
US subprime credit crisis and its implications from a corporate financing point of view
Thilo Kusch
24 April, 2008
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Dive on the M&A market
The value of announced M&A in Q1 2008 was down 40 percent from the same period last
year, resulting the least active first quarter since 2004
 The drop in M&A volumes has been accompanied by a sharp drop in activity in the debt and
equity markets
 The unfavourable stock price levels globally motivate potential sellers to put off deals until
market recovery
 The end of the credit boom and wild swings in the stock market have made M&A deals
harder to finance and harder to value
 The credit squeeze has been particularly felt in private equity deals, whose value has
dropped 71 per cent year-on-year
For Magyar Telekom the effect is twofold: (i) less acquisition
opportunity may arise, but (ii) less competition is expected from
the private equities
US subprime credit crisis and its implications from a corporate financing point of view
Thilo Kusch
24 April, 2008
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Roundtable discussion topics
I.
Role of financing – can capital market risks be excluded?
II.
Is there a balance of power between banks and companies?
Why do the companies have to bear the burden of the banks’ excessive risk-taking?
Lessons of Magyar Telekom…
US subprime credit crisis and its implications from a corporate financing point of view
Thilo Kusch
24 April, 2008
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