The Journey to the Capital Market is Far From Easy

Treasurers should not underestimate the expected impact of Basel IV regulation, warns Verband Deutscher Treasurer (VDT)

Destination, luggage, travel insurance: a holiday has to be well planned. It is no different when preparing for a trip to the capital market. What companies must consider when they want to finance themselves independently of banks was the topic at this year’s symposium of the Equity & Debt Department of the Association of German Treasurers (Verband Deutscher Treasurer, VDT), held on 26 April 2023 in Frankfurt am Main.

Starting with the expected influences of Basel IV regulation on corporate financing, the speakers presented various capital market and securitisation products, followed by an insight into the expenses involved. This overview was supplemented by an investor’s view and a treasurer’s experience report.

Consequences of Basel IV regulation for companies

It is already clear that the Basel IV regulation will ensure that capital requirements for bank lending will rise steadily from 2025 to 2032. This will affect all companies that finance themselves in the banking market. Even companies that have a good implicit rating but no external credit rating by a rating agency will not be able to escape the consequences. Businesses with long-term loans, blank loans, and undrawn credit lines will probably feel the consequences more than other borrowers.
While a precise quantification of the costs for the individual borrower and the individual products (guarantees, warranties and derivatives are also affected) is not possible at present, companies may have to consider accepting shorter credit periods and depositing collateral in order to reduce the required credit margins.

Companies should therefore (regularly) check whether today’s financing strategy will still fit in the future, even in a changed regulatory environment, and develop it further if necessary. Thus, taking into account the abovementioned influences, capital market financing, inventory and working capital financing or securitisation can be sensible components of a future financing strategy.
However, such changes in the financing structure sometimes require a lead time of several years and also affect other departments beyond treasury. For example, additional International Financial Reporting Standards (IFRS) reporting has to be prepared or an investor relations team has to be created. Furthermore, it must be considered that some decisions, such as those for an external rating or for an initial public offering (IPO), cannot simply be reversed.

Never underestimate ESG demands

In general, many companies that are not financed by capital markets will have to prepare detailed ESG reporting in future as a result of the EU taxonomy. This will also be increasingly demanded by financiers – whether banks or the capital market – and taken into account in financing decisions. The effort involved in preparing an ESG report should not be underestimated. Moreover, financiers expect a clear ESG strategy with ambitious targets that are aligned with the company’s business model.
Whether from Basel IV or ESG, treasurers will face a variety of additional challenges in developing and implementing their financing strategy in the coming years. The Association of German Treasurers will continue to accompany them on this journey with conferences, online events, and other exchange opportunities – from treasurers for treasurers.

Verband Deutscher Treasurer (VDT)


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