Branch cuts and employee reductions. Prime Minister Renzi, speaking at the last Ambrosetti Forum, advanced the prediction that in ten years, bankers will more than halve. A few days earlier, the CEO of Deutsche Bank had spoken of a drastic reduction in costs. The banking sector still seems to be in the midst of a crisis that is not only financial but also strategic affecting the traditional business model. Meanwhile, companies, especially SMEs, continue to struggle to find credit at the counter. And so the solution passes through alternative financing models often implemented by non-banking entities.
This is the case with hedge funds Tenax Capital which has been investing in the financial sector globally since 2004 and which at the end of July 2015 launched the Tenax Italian Credit Fund which provides loans to small and medium-sized Italian companies through the mini-bond tool. And which last June added an important element: the guarantee of the European Investment Fund (EIF) which will cover 50% of the loans made to SMEs by all the credit funds of Tenax Capital. "New glimmers are opening up for Italian SMEs with the direct involvement of European institutions to support credit needs and for all families and investors looking for alternatives to government bonds" he explained in an interview with FIRSTonline Massimo Figna, CEO and founder of Tenax Capital. “The EIF guarantee – he added – represents an important driving force for following up on the appeals aimed at a greater opening of the capital market, giving new outlets for investments in the real economy”.
What is the situation of banking institutions today?
“Banks in Europe more than in the USA are suffering enormously from the very strong reduction in interest rates. The 3-month Euribor is at -0,3%, at the beginning of the year it was at -0,15, a year ago it was flat. So within 12 months it went from zero to -30 basis points. This means a huge erosion of the interest margin for banks, around 22% since the beginning of the year. In this European context of compression of bank profits, the reduction of costs is very slow: the traditional banking model struggles to adjust the business and the costs of the branches are not covered by the turnover they generate. It is no coincidence that in recent days the CEO of Deutsche Bank has said that the costs of institutions must drop dramatically".
Does the stock performance on the Stock Exchange reflect these difficulties?
“All the banks have seen their stock market valuations drop. Think of the Italian banks they trade (they are traded on the Stock Exchange at the price of Ed.) at 0,2-0,3 times the net worth. They have suffered more than others because they are weighed down by the well-known problem of non-performing loans (Npl) which are much higher than the European average. In this context, credit to SMEs is even more difficult”.
And do the Basel 3 rules accentuate the problem?
“With Basel 3, the smaller the company, the greater the capital absorption increases if it lends itself to that company. Furthermore, if a bank finances medium-small companies over a six-month period, the weight of the capital absorption is medium-low, but if it extends the loan to 3-4 years, the capital absorption grows exponentially. The result is that an SME is generally only able to obtain 6-12 month loans from the bank. And this is true despite the fact that refinancing costs for institutions are very low, if not negative, after the interventions of the ECB. In fact, the problem of the banks is not that of earning less if they lend for 3-4 years but of having too high a capital absorption which does not make the equation of the operation as a whole work. The conclusion is that the combination of Basile 3 plus the burden of non-performing loans means that there is plenty of credit for larger companies, while there is no long-term financing for SMEs. Since our economic fabric is mainly made up of SMEs, it is understandable why the GDP continues to suffer. Hence the need to implement tools such as minibonds”.
Thanks to minibonds, you have entered the SME financing sector. In July 2015 you launched the Tenax Italian Credit Fund, what is it about?
“It is a closed fund, with a duration of 7 years, with an investment period of three years with no possibility of extension. Credit is guaranteed in the medium term, with disbursement flexibility tailored to each company. TICF invests exclusively in senior secured debt instruments, with an average of around 3-7 million euro per investment, a rate of return of 6-7% (after fees) and a target recovery rate of invested capital equal to 100%".
Who are your investors?
“We raised capital almost exclusively from insurance companies. Not only large groups but also medium-sized companies with enlightened managers. The insurance sector needs investments with a duration of 5-6-7 years to align with the duration of the policies. But in the next few years it will have to face the colossal problem of the fall in yields of the BTPs in which they are massively invested, which will align with 1,1% over the ten-year period”.
Precisely on government bonds you wrote the book "The end of the BTP is the rebirth of Italy".
"Yes, the thesis is that at the root of the lack of capital of Italian SMEs and of a certain culture is the fact that for years, with BTPs, they have had one of the best incomes in the world which has not prompted them to look for alternatives" .
How and under what conditions do you finance SMEs?
“We lend on average at rates above 5% and ask the entrepreneur for a guarantee. To do this, we build ad hoc minibonds with real guarantees, which vary by percentage, given by the entrepreneur. However, since July we have been the first management company, with funding outside the purely banking perimeter, to have received the go-ahead in Italy for guarantees from the EU Fund and the EU Commission, financed by the 300 billion Juncker plan".
What does it entail?
“The guarantee from the European Fund covers 50% of our loans made to Italian SMEs and makes it possible to significantly lower the "capital charge" (capital expenditure) for institutional investors who approach the credit funds managed by Tenax. In essence, the risk profile for investors is further reduced by having the guarantees of a fund of maximum creditworthiness behind them. The advantage materializes to a particularly evident extent for insurance companies which can count, within the scope of Solvency2 capital requirements, on the strength of the EIF's AAA rating. This reduces their capital absorption and at the same time improves the yield because the default rate is lowered”.
Are there benefits for SMEs too?
“The protection of the European fund is added to the physical collateral that companies typically place to guarantee the loan, thus favoring a wider interest among investors and faster times in obtaining disbursements. At the same time, the number of SMEs that can potentially access financing is expanding".
What is the fund's total assets under management?
“We have around 100 million euros in assets. It is a market that needs to start and that has the potential to grow. On the one hand, the private debt market in Italy is still microscopic compared to needs, one billion compared to the 25 billion needed only for the refinancing of current loans, there is no mention of new credit. On the other hand, the insurance companies have invested a trifle compared to their size. This type of investment will tend to increase a lot, especially if there are guarantees such as that of the European Fund".
What kind of SMEs are you targeting?
“We address companies with turnover of less than 100 million euros that are not distressed and that need resources for growth, expansion, maintenance of production and sustainability of existing debt. The underlying theme is to sit down and have the flexibility that the bank does not allow, asking companies to adapt to its parameters. We are very flexible in conditions. But we need to have collateral because people's pensions are invested in our funds. Also for this reason, our minibonds are usually not listed, because they allow us a greater possibility of due diligence".
At what point is the minibond market in Italy?
“The minibond is an instrument that got off to a bad start because it was used by some banks to solve their problems rather than to help the company develop. They can therefore be very risky tools and must be analyzed and managed by professional operators. This initial attitude that slightly distorted the tool has recently been corrected and today we have developed various relationships with banking institutions that work as originators and that earn a fee on this service, therefore without conflicts of interest”.
Are we heading in the direction of a new banking model here too?
“Yes, the bank is intended to make services, payments and short-term credit. And you can avail a third party for long term credit. At the beginning they saw us as a competitor, now they understand that we are an ally who can provide a service that they are unable to provide and on which they can generate revenue through a fee".
When will there be light at the end of the tunnel for banks?
“In order for banks to be able to stand, they must not only have capital but also make money. And to date their profits have dropped significantly due to a combination of financial factors and, as mentioned, the business model, and therefore strategic problems. In countries where there are few banks this problem is less, where there are many such as in Italy it is greater. The light at the end of the tunnel is that we may think we have reached a level of relative stability. Rates have been stable for a few months and the Brexit effect is being absorbed. Once rates have stabilised, we can begin to see a gradual recovery, but this must come from a process of aggregation and cost cutting. That said, in terms of investments in Tenax Capital bank shares, we are more invested in Europe than in the USA. We believe that in the Old Continent there can be a stronger financial recovery and we are selectively present in some realities and in those with a higher dividend".
