News Europe -Based Finance Can Support Stability

broaden the type of funding available to companies.

She states that the FPC will work with the wider Bank to examine the impediments to the development of market- based finance in the UK. As part of this work, it will assess and, where necessary, act to: Promote a better functioning securitisation market in the United Kingdom; Consider whether a credit register might support financial stability; Enhance the resilience of liquidity in those financial markets important to our financial resilience; Reduce the risks to the system arising from procyclicality in the availability of finance, including via collateral markets.

“This targeted approach to market-based finance is timely, sensible,

proportionate and constructive. By identifying actions that support greater diversity in the financial system, the FPC

can

enhance the system’s overall resilience (its primary objective) and create the conditions for sustainable economic growth (part of its secondary objective).” Of particular importance to Dame Clara, is that the financial system is able to provide credible long-term equity capital to promising companies to support innovation and future economic growth.

“In my view, long- term private sector investment, particularly in infrastructure and SMEs, is fundamental to our economic future; this was also highlighted by the G20 in its February communique. In particular,

I would like to try to ensure that necessary mechanisms operating in the financial system to address specific risks do not, when taken as a whole, unduly damage the ability or willingness of investors to provide committed long-term equity funding.”

Dame Clara highlights four impediments to the availability of long- term equity finance: short-termism, driven, for

example, by the

use of mark-to-market accounting in sectors such as life insurance; the trend towards liability- driven investment among institutional investors, which, though in some circumstances rational, has been defensive and has probably put steady upward pressure on the cost of equity; non-bank financial

investors who finance long- term “illiquid” assets with short-term liabilities, which may encourage investors with similar exposures to hold more short-term low-volatility liquid assets. Finally, Clara cites the powerful asymmetry in the UK in the tax treatment of debt and equity as providing a long-standing structural incentive to fund businesses with debt rather than equity. “My concern is that frictions such as these could mean that the ‘low for long’ market interest rate environment is masking an underlying weakness in investor appetite for equity. For example, despite the widely-reported search for yield, equity risk

premia

remain above their long-run averages in the UK, US and euro area, as evidenced by secondary market pricing.”

ate Ratings Resistant To Russia Sanctions

Less severe effects, such as higher funding and energy costs, could be weathered in the short-term. However, pressure on credit metrics would rise if political tension persists.

Most vulnerable are the

handful of corporates that generate a significant proportion of their revenue or operating profit in Russia.

Carlsberg (BBB/Stable) generates around 20% of its revenue in Russia. Should Carlsberg permanently lose its Russian unit, which we understand is effectively debt-free, gross FFO leverage would increase by up to 1.5x. The overall profile would also deteriorate due

to lower diversification and fewer resources for growth, potentially leading to a one- notch downgrade.

The contribution to Carlsberg’s consolidated cash flow from Russian operations is also substantial (we estimate it at more than 30% in 2013), although the loss would be partly mitigated by the increasing importance of Asia

of adjusting to adversities in the country and a step-up in these challenges should be manageable at the current rating.

and

the resilience of profits in Western Europe. In a less severe scenario, where the government weakened management’s ability to control strategy, Carlsberg could find it harder to tackle the many challenges in the Russian beer sector. We take comfort from its track record

Atrium’s (BBB-/Stable) exposure to Russia represents 28% of net rental income and 19% of its total asset portfolio by value, but only seven out of 153 properties. Nonetheless given its low leverage, a

downgrade would be

unlikely even in an extreme scenario. We believe Atrium’s balance sheet management factors in the inherent level of risk in the region.

Metro’s (BBB-/Stable) revenue exposure to Russia

is estimated at below 7%. Stripping out Russian operating profits, and assuming Metro would not pay its Russian leases under this scenario, we estimate FFO net leverage could rise by 0.3x-0.4x to around 4.7x. This is still below our guideline for BBB- of below 5x. If the planned IPO of 25% of Metro Cash and Carry (MCC) Russia were cancelled, leverage would probably only rise 0.1x-0.2x, as the reduction in debt would be partially offset by the loss of EBITDA on any disposal. It would however slow MCC’s expansion as the proceeds are earmarked for re-investment in fast- growing countries.

Uranium One (BB-/Stable) generates roughly 40% of its revenue in Russia through off-take agreements with its ultimate parent, state- owned Rosatom, to supply up to 51% of its marketable production at spot prices. This includes up to 100% of attributable production from its Kazakhstan mines. Losing the Russian cash flows would be detrimental, especially with uranium prices near multi-year lows. However, this is not our base-case scenario as the strong political commitment to peaceful nuclear cooperation between Russia and Kazakhstan implicitly covers Uranium One’s Kazakh operations.

13 Dame Clara also points

out that regulation is vital in promoting confidence by building a framework with predictable and proportionate rules, standards and reactions, but that businesses and investors must also play a part in developing high standards of corporate governance and building trust.

“It is vital that those invested in our financial future engage actively with regulators in shaping the boards and business models that they believe will build a safer financial system, equipped to finance and support broad-based UK economic growth in an ever expanding global market.