A corporations’ finance needs go well beyond those of a regular small- or medium-sized enterprise (SME). Bigger companies are not just looking for a one-off loan to buy equipment or pay salaries. The scale of operations is on a whole other scale – and that’s where corporate banking comes in.
In a sense, corporate banking does not sell single-facility products (say, a working capital loan): it’s proposition is centred around more structured products to help companies scale up or restructure. In fact, when reading on corporate banking you’re likely to encounter the phrase “structured finance”: agreements between that include multiple transactions (as opposed to a single facility), as well as complex instruments to manage debt risk. You may have heard, for instance, of collateralised debt obligations, asset-based securities etc.
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Because companies often also need to access the capital markets, corporate and investment banking are often grouped by lenders under a single division. Investment banking comes into the mix when companies need to raise capital through a stock offering or a stock exchange float, are pursuing mergers and acquisitions (M&A), want to securitise some of the debt on their balance sheets – in general, companies that need to access the financial markets ecosystem.
Corporations are obviously more high-visibility entities than SMEs, and lenders are unlikely to ask them for the same kind of security, like securing debt against machinery. That said, some corporate banking operations can go spectacularly wrong, and because the lender is dealing with big entities, the fallout on the balance sheet could be ruinous.
One of the most high-profile cases of corporate banking gone south is the collapse of Carillion. A syndicate of various high-street banks had been lending hundreds of millions of pounds in a “reverse factoring” scheme for the UK construction company, to allow it more time to pay suppliers (many of which were, in fact, SMEs). The banks’ refusal to allow for expanded facilities for the loss-making company eventually resulted in its collapse, and the fallout was not pretty: it resulted in impairments of £127m (€141m) and £108m for Barclays and Lloyds respectively, while Santander UK took a £91m bad debt hit.
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