Raising Capital Summit: Budget 2021 was ‘significant for Irish companies’

Government capital investments in infrastructure and technology are important foundations, says Myles O’Grady of Bank of Ireland

23rd October, 2020
Raising Capital Summit: Budget 2021 was ‘significant for Irish companies’

What's your name and what position do you hold?

Myles O’Grady, group chief financial officer and executive director at Bank of Ireland Group plc.

What are your day to day responsibilities?

My responsibilities focus on protecting and sustainably growing capital. Right now, I am allocating much of my time to understanding and responding to the financial risks associated with Covid-19. Assessing the impacts on loan losses, loan book and income growth, cost reduction and capital levels are particularly relevant activities right now.

At a strategic level, implementing the bank’s transformation plan and understanding the future business model in a post Covid-19 environment are both very important areas of focus for the management team and board. I also spend considerable time meeting investors, analysts and regulators.

What is your professional background?

I have 30 years’ experience as a finance professional, including 25 years in financial services in Ireland and internationally. I worked with Irish, UK and US banking organisations. In addition to traditional finance roles, much of my experience relates to business restructuring, corporate strategy and capital raising.

How do you see the current situation affecting capital fundraising for businesses?

Covid-19 and the forced shut-down of domestic and global economies is putting businesses under severe financial pressure. Businesses which were healthy before this pandemic are now dealing with cashflow issues, and in some cases viability challenges. Government and banking initiatives can help, the Credit Guarantee Scheme being a good example, however companies will need to raise additional capital for a number of reasons. Some businesses will want to invest to reset their business model to try and get back to pre-pandemic revenue levels, while others will seek to exploit opportunities presented by Covid-19 to grow and expand their businesses. A good example of this is changing customer preferences such as on-line shopping and greater digital adoption. These are opportunities requiring investment and capital.

What’s your view of the measures introduced in Budget 2021 to boost investment in innovative Irish companies?

At a very high level Budget 2021 was significant for Irish companies as it provided a rare counter cyclical stimulus to the Irish economy instead of chasing the downturn with cuts in public investment.

As a result, it featured a range of measures to support businesses through the Covid-19 pandemic and stimulate the economy and employment. Aside from the practical benefit of these interventions, they demonstrate a pro-business mindset from government.

There is no budget measure which can fully mitigate the loss of revenue from the necessary public health restrictions, but a number of schemes introduced will provide a lifeline to companies, especially in the worst hit sectors, so that they have the opportunity to recover in 2021. It is also important to recognise that the budget was just the latest set of interventions to support business. Even before the budget the value of Covid-19 supports announced by the Irish government amounted to €24.5 billion or 14 per cent of national income which compares well internationally.

One of the measures introduced by government and facilitated by Bank of Ireland is the Future Growth Loan Scheme. It is a long-term loan (7-10 years) that is offered by the SBCI, with the support of the European Investment Bank, which offers lower cost finance for long-term investment. There has been a good response from expanding innovative companies seeking to access this funding to finance investment. Last year we were the largest lender with a €110m allocation and had fully allocated the scheme by late December 2019. Responding to the interest from Irish companies the government increased the capacity of the scheme to €500m in July. We opened the scheme again in August of this year and we have seen a solid flow of enquiries and applications. Any business looking to finance expansion or pivoting to change their business model should examine its potential. The employment and Investment Incentive Scheme offers income tax relief on investments which is also encouraging.

When might the IPO market recover?

The IPO market closed three times since 2016 – this often occurs when listed stock valuations fall below book values. If an investor can buy an existing listed stock with a track record at a discount, why take a risk investing in a new company with no trading history as a listed company, particularly in a period of economic downturn and uncertainty? The IPO market will recover and we should expect more activity as stock markets rebound, and there have been successful US and European IPOs in H2. Other important considerations that will help bring IPOs to the market include the US Presential election result, Brexit outcomes and, driven by COVID-19 factors, a macro economic outlook that all market participants can reasonably rely on. With further lockdowns now a reality, we may see the IPO recovery stalling, however the longer term outlook is encouraging as economies recover and we learn to live with COVID-19.

What are some of the new challenges growth-stage businesses encounter when they are on the lookout for new investors?

COVID-19 presents a new lens by which investors will now assess investment decisions. In many ways this is accentuated for growth stage businesses. It is not just about surviving this pandemic – companies that can demonstrate the ability to sustainably grow revenues and therefore increase business valuation have the best chance of securing funding. 2020 has been a challenging year, and while there are good examples of successful capital raises there has been a reduction in the number of investments and the volume of capital invested. Early stage companies are more likely to find it difficult to secure funding. Investor response to COVID-19 is biased towards existing portfolio companies to ensure survival of those companies. It is therefore a difficult time for new companies, particularly for those who have not proven their business model. Support from Government is important, with the Enterprise Ireland’s Sustaining Enterprise Fund an example of new funding options available.

What can the government do to attract private capital investment in firms and make equity financing easier to access?

At a macro level, government capital investments in infrastructure and technology are important foundations that send a positive signal to private investors. For 2021 the government’s published budget for capital investment has gone over €10 billion for the first time in the history of the state. Appropriate tax incentives and grants are also helpful. Policies which target and support growth sectors such as “green” are to be welcomed. In a world of uncertainty, investors are also attracted to long-term-policy stability. No investor likes having the rules changed suddenly or without notice. The Irish government’s long-term commitment to the 12.5% corporate tax regime is a standout example of policy stability and certainty.

What are the options to raise capital post-Brexit?

I don’t see specific or structural impediments to raising capital post-Brexit. Notwithstanding the challenges and uncertainties associated with Brexit, sustainable investment opportunities will still attract investors and capital.

What’s next for your company?

At Bank of Ireland our immediate focus is to work with our customers through this pandemic while also supporting the recovery and reboot of the Irish economy in whatever way we can.

We are supporting customers in a range of ways. This includes payment breaks and other sustainable solutions for those experiencing financial difficulties, and the provision of asset finance and working capital to our business customers.

We are also strongly supporting economic recovery and reboot, for example through mortgage lending – which is very important, both for homebuyers and upstream homebuilders – as well as the Credit Guarantee Scheme, and the Bank’s Sustainable Finance Fund for green lending to consumers and businesses.

As we look to the future, adapting our business model to a post Covid-19 environment is an ongoing focus. We continue to deploy new digital solutions to meet evolving customer preferences. We are creating a more agile working environment that supports our employees and creates efficiencies. And safely reducing operating cost remains an imperative, an area where we have had considerable success and will continue to do so into the future.

The measure of a successful bank is a strong balance sheet with an efficient operating model, which offers great solutions to its customers and delivers appropriate returns for investors. The banking sector across Europe is a challenging environment, largely driven by external factors such as the low interest rate environment, Brexit and now Covid-19. Despite this, Bank of Ireland is working hard to support its customers while navigating these challenges, which leaves us well positioned for the future.

Myles O’Grady is speaking at The Business Post’s Raising Capital Summit, a virtual event on Nov 4. Visit www.capitalsummit.ie for details.

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