More information about the financial performance of U.K. midsize companies could help in the development of capital market funding for this sector, says Standard & Poor’s Ratings Services in a new report titled “Midsize U.K. Companies Seek New Funding Sources To Unlock Growth.”
As the U.K. economy starts to recover, U.K. mid-market companies – which S&P defines as firms with revenue of between €100 million and €1.5 billion (between £85 million and £1.3 billion) – face a contraction in bank lending, potentially limiting their opportunity to grow and develop. While alternative sources of funding are available, potential investors are, in the agency’s view, being held back by a lack of transparency on mid-market companies.
S&P has analyzed an overall dataset of non-financial parent companies operating in the U.K., for which it found more than 30,000 listed and unlisted companies tracked by S&P Capital IQ.
“The results from this group show that, for the past seven years, profit margins are on average 1.7 times lower for U.K. mid-market companies compared with their larger peers, although they are less volatile,” said Standard & Poor’s research analyst Taron Wade. “Our study also found that U.K. midsize companies consistently maintain higher cash and short-term investments to total assets than their large and small peers, and maintain more conservative financial leverage ratios than large U.K. companies.”
In general, the sector-by-sector breakdown of U.K. mid-market companies mirrors the larger market, with the majority of firms operating in the consumer discretionary (ie., non-essential goods and services such as retail, media, and autos) and broad industrial sectors. Exposure to these sectors should help U.K. mid-market firms to benefit from the economic turnaround.
According to S&P’s economic research, the largest contribution to GDP growth on the output side of the economy in the third quarter of this year came from the services sector, which increased by 0.7% quarter-on-quarter. Consumer spending is likely to contribute the most to economic growth in the coming two years, and the agency estimates private demand will rise by 2.3% in 2014 and 2015, supported by improved confidence, rising employment, and an improving housing market – all of which should boost consumption and reduce the savings rate.
Mid-market companies in the U.K. are ten times greater in number than their larger peers in the country, and generated roughly a quarter of total sales for U.K. firms in 2012. However, while mid-market companies contribute a great deal to the local economy, they are more sensitive to the contraction of bank lending than their larger peers. And even though the U.K. private placement market is growing – with an estimated £6 billion raised in the past three years – in S&P’s view it lacks transparency in terms of transaction flow, and there are barriers to further development, including regulation. – Staff reports
The report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to [email protected]