The decline in long-term loans to the public sector

Over the last few years, banks have been reluctant to grant long-term loans to government and social profit organisations. There are a number of reasons for this trend.

According to Joachim Verheyden, Head of Business Development BNP Paribas Fortis, the main reason for the decline is the creditworthiness of the public and social profit sector:

"In the past lending to an authority or social profit organisation was viewed as zero risk. Ratings did not even exist for public authorities. The assumption was that authorities would always be able to pay their debts, because if it became necessary they could always raise taxes. Thanks to the European debt crisis this perception has now changed: the view of risk for a loan to an authority has become less positive, given the position with their outstanding bad debts. This is having an impact on the term and the cost of loans."

The second reason for the reduction in long-term loans comes from the Basel III guidelines. Basel III imposes stringent rules, to reduce the "mismatch" between long and short term at the banks. Explained simply? Joachim Verheyen:

“Customers deposit money at the bank. Those are liquid funds that we can be withdrawn again at short notice. The bank uses this money to provide credit. That is therefore long-term money. The gulf between the two - the "mismatch" - is traditionally bridged using the interbank market. During the US mortgage crisis in 2008 this interbank market suddenly dried up completely: the banks no longer dared to lend each other money. All the systems threatened to grind to a halt and Europe had to intervene to fill in the gap between them. Hence the introduction of Basel III, with stricter capital requirements on the banks. They need to have more liquidity relative to their long-term commitments. The longer the term, the more substantial the liquidity has to be.”

An important consequence of the Basel III guidelines is therefore that banks are less happy to lend for a very long term. Or if so, then at a very high interest rate. Luc Zuallaert, Director of Public Banking at BNP Paribas Fortis:

"Because of Basel III banks are less competitive in the area of long-term lending. If a bank were to lend today over thirty years, then we would have to demand a much steeper interest rate. Meanwhile in the public and social profit sectors there are hardly any loan applications for thirty years. Over the last few years the banks have sent clear signals to the local authorities and organisations who have understood perfectly. For example, hospitals now finance their construction projects over twenty years, not thirty-three, adding three to five years for the drawdown period during the actual construction. The hospitals themselves are no longer asking for very long loan terms: in twenty years a medical building will in any case be ready for renovation."

And other institutions in the public and social profit sector have also reduced their demand for long-term lending, according to Luc Zuallaert:

"In the towns and villages in Flanders the vast majority of demand - a good 65 to 70% - is still around twenty years. Comparison with Brussels is difficult because it has a separate financing vehicle. In Wallonia there is apparently still demand for old-fashioned long-term loans. That is because project-based financing is still used there. In Flanders, the new policy and management cycle was introduced this year, aligning the accounting more closely to that of a company. The towns and villages in Flanders are no longer working on a project basis, but finance their own cash flow. Therefore they are less tied into longer terms.”

The stricter capital requirements of Basel III will of course play a role in the shortage of long term lending, admits Wim Moesen, emeritus Professor Catholic University Leuven. The impact of the higher risk valuation of public authorities is something he puts in perspective:

"This risk is still limited. Europe is keeping a very close eye on debt: going off the rails, as happened now and then in the past, is no longer an option. In addition, authorities do have the power to tax. In an emergency they can always increase taxes a bit. Personally I find the extremely low interest rates are the greater villain of the piece. Some day interest rates have to go back up. And that is another reason that banks are not very inclined to commit to long-term lending."



Market financing for the public sector: good idea?

For long term solutions (twenty to thirty years) the focus in the last few years has shifted from traditional bank financing to market financing. Is it a viable alternative?

A new kid on the block? More like a comeback kid, is the opinion of Wim Moesen, emeritus Professor Catholic University Leuven:

“Market financing means that authorities are financing investments via the direct issue of bonds or other debt instruments. In the past, cities and villages did that more frequently, for building roads, industrial estates, a sports centre, etc. But over the years it has fallen into disuse, mainly because of the dominant position of the 'tied bank'. This is not suitable for all authorities: you need to do it on a certain scale because of the costs involved. Or you need to bundle things, that's another option."

In any case, financing on the capital markets can be a useful solution for both parties. On the one hand, governments and social profit organisations obtain an alternative to bank credit that is sometimes also cheaper

And for pension funds, insurance companies and other institutional investors there is growing interest in debt instruments issued by public authorities. They have a more 'natural' relationship than banks to taking on very long-term commitments, according to Katherine Dior, Head of Primary Markets, BNP Paribas Fortis:

"Insurers, for example, are well able to estimate how much money they need to spend over how many years. They want to match that to long-term investments, so that they can manage the risks correctly."

In specialist finance magazines a distinction is often made between three forms of financing on the capital markets: institutional bonds, retail bonds and private issues.

  • Issuing institutional bonds is suitable for large organisations with a stable reputation (whether exchange listed or not) and high value issues.
  • For smaller organisations retail bonds could be of interest. This kind of bond is aimed at private investors who can subscribe in denominations of EUR 1,000.
  • In a private placement, the debt is offered to a limited number of institutional and/or wealthy private investors.

Katherine Dior prefers to see things from a different point of view:

"It is still about debt. You can of course choose a particular type of investor depending on what is needed for the structure of the financing. For example, it is obvious that you do not offer small savers an investment that is poorly documented and full of risk, and into the bargain has a twenty year maturity. Given the current low interest rates, retail bonds are being issued less frequently than institutional bonds or private placements. Small savers think: if I have to lock up my money for seven year for a 1.5% yield, then I might as well just leave it in a savings account. With loyalty bonuses they will probably get around 1.1%. The long term, that is so much a part or public authority investments, is mainly music to the ears of institutional or wealthy private investors."

The roles of a bank

If authorities and other organisations go directly to the capital market to finance their investments, does it mean that banks just drop out of the picture as brokers? That is happening already in some cases, it is likely to happen more often in future, provided that the market improves. But that does not mean that banks will disappear entirely from these operations. Katherine Dior lists three reasons why banks can (and often must) still have a useful role to play as intermediary.

“The first reason is the need for secondary trading. This relates to the liquidity of the debt. If an investor buys debt instruments from a public authority, then the investor will probably want to sell them again over time. At present bonds are only rarely traded on the stock exchanges. So the market players need to be able to buy and sell 'over the counter', without using the stock exchange platform. Banks can do that.”

The two other reasons relate to the role of adviser, says Katherine Dior:

 "A bank can first of all advise on structuring. This depends on the party issuing the bonds, the investor, the value, the term and so on. In some cases a one page contract between two parties defining the arrangements is ample. In other cases you need a stock exchange listing and a prospectus with hundreds of pages, a so-called European Prospector's Directive Compliant Document. It goes without saying that the latter option will cost more than the first. Things like this push up the fixed costs, but that is fine if the amount is large enough.

As well as these structural elements, a bank can advise on the price. Suppose the authority issues bonds and the investor wants 5% over a five year term. How do you know whether that is a good deal? And what is the competition offering?”



Financing via bank loan or capital markets?

The question as to which of the two approaches is cheaper is not simple to answer.

Luc Zuallaert, Director Public Banking BNP Paribas Fortis:

"In the past we assumed that the capital market was more expensive than bank lending, but over the last few years you will often have heard the opposite. A great deal depends on the costs involved in a transaction on the capital market, like a potential prospectus. These costs are a burden especially for smaller amounts. If I compare our pricing for traditional and bond loans over the last few years, then it looks like sometimes one, and sometimes the other is cheaper. It is six of one and half-a-dozen of the other."

Cautious return

For the moment financing via the capital markets is only a very minor part of the total financing pot. Will that change in future? Will traditional bank loans make way for bond loans? Luc Zuallaert does not believe that is the way it will go:

"People have learned a lot over the last five years: public and social profit institutions now realise that there is a need to diversify. Things can always go wrong with a bank, and it is interesting to be able to draw on another source of finance. The capital market's share is therefore likely rise some more.

On the other hand, bank loans have recently been making a cautious comeback. For a while it looked like the public sector was going to continue finding it increasingly difficult to get financing through the banks. Now the public sector is again able to get bilateral credit facilities more easily from the bank. This is because the banking sector has found itself in somewhat calmer waters in the last few years. The banks have more liquidity and are again daring to think and invest more long term.

Moreover, public authority risk is again being viewed more positively, because public debt is gradually being reduced. The earlier focus on the very long term is doubtless not going to return. Especially in Wallonia there is still occasionally demand for terms of thirty years and more. The banks don't really like doing this and it is also more expensive. If possible, we are advising clients to borrow up to ten years. Then we will see what the best option is, for example, for refinancing. The interest rate on a ten year loan and the liquidity premium that the customer has to pay are a good bit lower than for twenty or thirty years. The whole story of unavailable or unaffordable bank loans was a hundred percent true some years ago. Nowadays the situation has changed somewhat."

Public authorities and social profit organisations have in the meantime been discovering the capital markets:

  • Usually this has been in the form of joint programmes where cities and local communities have the possibility of issuing long-term bond loans, although Mechelen and Zaventem, for example, were able to issue small bond loans of around EUR one million.
  • In Flanders there are thirty or so municipalities that are going directly to the capital markets with loan instruments. This includes cities such as Ghent and Hasselt, and also other municipalities such as Zaventem.
  • In Wallonia, towns such as Liège, Seraing and Namur are now also using the capital markets.

Beware of bullets!

There is a risk associated with this trend towards financing through the capital markets. In nine out of ten cases these are bullet loans, because that is what investors prefer. Unlike a traditional loan, all that you have to pay is the interest. The principal is only repaid at the end of the term. Or refinanced.

Wim Moesen, emeritus Professor Catholic University Leuven: “You run the risk that you may not be able to repay the money, or that it is difficult to get a new loan, or that the interest rate has risen sharply in the meantime. Public authorities should therefore treat bullet loans with great caution. They might be tempted to let the next legislature inherit the debts."

Luc Zuallaert: "In Flanders bullet loans are legally possible, but there have already been many questions raised about them in the Flemish Parliament. Politicians are concerned about the creditworthiness of the municipalities and the potential for postponing debts. Care is indeed necessary to avoid extreme measures."



The power of the people via crowdfunding

For bank lending and debt financing on the capital markets it is only the numbers that matter. With crowdfunding, on the other hand, other factors are involved such as social returns.

A couple of years ago, the Brussels philosopher Philippe Van Parijs launched an extraordinary appeal in the press. He called on European civil servants and diplomats to set up a 'Piazza Schuman Fund', funded by crowdfunding. The money was to be used to renovate Schuman Square (next to the Commission's Berlaymont building) in the European quarter of Brussels.

As the chairman of the European Commission Romano Prodi wrote so eloquently in 2001: "This area should be a European meeting place, a piazza for the whole continent; Europeans need to feel that they are visiting the heart of Europe." This means that the traffic would need to go into a tunnel.

Many studies and architecture competitions and plans later, Schuman Square is today still the same noisy and unappealing traffic roundabout. Time to replace the top-down approach with bottom-up approach, thought Philippe Van Parijs (Professor at the universities of Louvain-la-Neuve, Leuven and Oxford). His inspiration was the rich people of Brussels who a century ago barely had to pay any taxes. To finance some projects to improve the public areas, the city called for "public subscriptions". The rich people, in other words, dipped into their own pockets and provided the money to make the city more appealing.

"There is no need for hope to take action and no need for success to persevere".

The Europeans in Brussels are today in much the same boat as the upper class in the nineteenth century, is the philosophers view: they are well-off but pay little tax. Anyone who feels a bit embarrassed by this would probably react favourably to his appeal, he hopes. The Europeans in Brussels would make a practical contribution via the fund to improving the quality of the European capital. Van Parijs proposed that they should have a picnic next to the roundabout to discuss it. He would turn up in an orange cloak, in memory of the greatest son of Brussels of all times: William of Orange. His motto was:

Bypassing the ratio

In line with the philosophy behind this motto, since then not much more has been heard about this initiative. Which does not mean that crowdfunding has no future, believes Aymeric Olibet (Business Development BNP Paribas Fortis):

“With crowdfunding many people invest a small amount in a goal in which they feel involved. In this way initial capital is created and such projects can easily be started up and go viral."

Bank lending and debt financing in the private market take place in the world of key ratios. It has to be bankable business: investments with an acceptable risk and a reasonable return. That makes sense, because the financial world is working with other people's savings and has to manage them prudently. Aymeric Olibet:

"The ratios have become so important that you sometimes get the feeling that the whole credit market is being stifled. Everything has to be worked out down to decimal points to avoid running any kind of risk. Some initiatives, which produce more of a social than economic benefit are therefore difficult to finance. Crowdfunding bypasses the ratio. There is a strong chance that your money will generate little or no return, but you will help to achieve something you believe in. Let's assume that the government in a certain district cannot or will not invest in childcare. If just a few hundred residents invest a small amount of money in a new crèche through crowdfunding, it can probably get started."

Crowdfunding is mainly known thanks to success stories from the business world. The system was initially used mainly to finance films, books and new apps. Meanwhile there are more and more projects up and running in the public arena. This matches a trend towards authorities who want to pull back and responsible citizens who want to shape their own environment.

Passion and adventure

A well-known example in the Netherlands is the Luchtsingel canal in Rotterdam. The wooden pedestrian bridge is 390 metres long and links neighbourhoods that are not connected by roadways. Residents and companies are helping by buying planks for the bridge which will have their name stamped on them. The investment ranges from EUR 25 to EUR 1,250. In New York there is also High Line Park. A group of local residents have organised the conversion of a two kilometre railway viaduct along the west side of Manhattan into a neighbourhood park. For this kind of initiative often only a part of the money (for example feasibility studies or a part of the works) is covered by crowdsourcing. The authorities then provide the rest. The local residents also actually have an interest in their investment: their neighbourhood not only becomes a more pleasant place to live, but the value of their property often rises too.

Aymeric Olibet: “I strongly believe in the value of crowdfunding. Passion and solidarity with future generations are far more important than rational investment criteria. It makes it easier to get moving on riskier, innovative projects. And the European economy sorely needs these in order to grow. The nice thing about crowdfunding is that the risks do not end up on the balance sheet of a bank. So there is no systemic risk. For the investor, the risk remains limited, as he/she invests only a small amount and also normally knows exactly what the money is being used for.”

Can a fashion company be successful even if it forgoes the excesses of fast fashion? Definitely, as Jean Chabert proves with Stanley/Stella, which produces custom-made clothes from organic cotton.

“We want to be a game changer,” says Jean Chabert, CEO of Stanley/Stella. "When I was born 62 years ago, 2 billion people were living on our planet. Today there are 8 billion. That’s the reality, so we need to stop depleting resources. Human activities always have consequences, but we must constantly strive to improve. That’s our commitment, and we enshrined it in a charter in 2022. We monitor our entire ecosystem and focus on people and trust."

Clothing as a means of communication

The B2B company from Brussels sells clothing that serves as a means of communication. Stanley/Stella customers have T-shirts, sweatshirts and hoodies printed or embroidered and they offer these personalised items to their own customers. "We're in a giveaway industry, and our prices are at least 50 per cent above the average. But we offer superior quality and respect for people," says Chabert.

Organic cotton: half the water

15 of the 220 Stanley/Stella employees are directly or indirectly involved in Environmental, Social, Governance (ESG) activities. For example, they check that agreements on working conditions and safety at the production sites are respected. The company buys its organic cotton, produced without Genetically Modified Organisms (GMOs) or pesticides from India, Tanzania and Turkey - it uses 70 per cent less water than conventional cotton. Stanley/Stella has also made long-term commitments throughout the production chain to minimise any negative impacts on people and the environment. For example, 90 per cent of containers arrive at the warehouse in Germany by inland waterway, the least polluting form of transport.

Considering all the impacts

“Of course, we have to remain realistic,” Chabert adds. "Companies that want to be viable must also remain profitable. By definition, we use resources to make textiles. So, we consider all the impacts. For example, we continue to operate our textile decoration business in Europe, even if it's more expensive. Wastewater containing inks and dyes is treated and reused. At the moment, we can't avoid electricity being generated by gas in Bangladesh. We check how willing a country is to make progress in this area. And in the meantime, we offset what we can't avoid."

Trust and humanity

“Trust is at the heart of any good relationship,” says Chabert. "I used to have a cash flow problem. I relied on my own equity and for years, had no loans. I was the only shareholder for a long time. Eventually, I opened my capital to 40 per cent and applied for loans from BNP Paribas Fortis. Today, we know each other well, and I don't have to explain my company's limitations; they know the industry. They co-finance the stock, offer an invoicing solution, support our development in the United States thanks to their international network, and much more."

Today, it’s full steam ahead for Stanley/Stella. In 2023, turnover more than doubled to EUR 170 million. The company also hopes to enter Japan and South Korea soon. For Chabert, one thing is clear: "Our most important wealth is not on the balance sheet. It’s our people."

Stanley/Stella is ready to change the world. Discover more entrepreneurial stories.


We monitor our entire ecosystem, focusing on people and trust.

Our prices are at least 50 per cent higher than the average. But we offer superior quality and respect for people.

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