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S&P Report: Midsize U.K. Firms Look For Alternate Sources Of Funding To Capitalize On Economic Recovery

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 we define as firms with revenues of between €100 million and €1.5 billion (£85 million-£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 our view, being held back by a lack of transparency on mid-market companies.

To this end, we have analyzed an overall dataset of nonfinancial parent companies operating in the U.K., for which we found over 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 (that is, nonessential 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 our 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. And consumer spending is likely to contribute the most to economic growth in the coming two years. We estimate that 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 about a quarter of total sales for U.K. companies in 2012. However, while mid-market companies contribute a great deal to the local economy, they are more affected by the contraction of bank lending than their larger peers. And even though the U.K. private placement market is growing, with up to an estimated £6 billion raised in the past three years, in our view it lacks transparency in terms of transaction flow and there are barriers to further development, including regulation.

Standard & Poor's Ratings Services, part of McGraw Hill Financial (NYSE: MHFI), is the world's leading provider of independent credit risk research and benchmarks. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 23 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.

Standard & Poor’s Ratings Services
40 Rue de Courcelles, 75008 Paris

Lundi 2 Décembre 2013

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