Not much risk management in the middle market

Bankers have been talking to their business customers about the need to pay more attention to risk management to mitigate the effects of higher rates, liquidity constraints and a likely economic slowdown.

But the message is not getting to the middle market, banking industry researcher East & Partners said yesterday.

East & Partners analyst Zoran Knezevic said the group's latest survey of middle market businesses (companies with turnover of $100 to $340 million a year), said only about 20 percent of respondents were using risk management tools such as interest rate and foreign exchange derivatives.

"Businesses tend to take an optimistic approach to hedging," said Knezevic.

"If they haven't been burnt in the past they tend to think it won't happen to them."

He said use of risk management tools was much more common among bigger companies. East's survey of "institutional" businesses (the top 500 companies) showed more than two-thirds had risk management policies.

The survey confirmed reports from banks during the recent interim reporting season that companies are looking to do more business with their banks now that access to the capital markets is limited.

The number of institutional respondents that said they were seeking bank debt rose from 66.4 to 76.5 per cent over the past six months.

Knezevic said: "In the past few years the top 500 companies have been steering away from the use of plain vanilla bank debt. Our report reveals a dramatic shift."

He said 16 per cent of top 500 companies said they would be looking for additional finance over the next six months. That response rate has gone up from seven per cent a year ago.