INTERNATIONAL
Europe Has Plenty of Capital for Expansion U.S. chemical firms keep up the pace of European expansion despite curb on dollar investments overseas Investment by U.S. chemical companies in western Europe isn't losing its momentum despite the Government's pressures to keep the dollar at home. This doesn't mean that the chemical industry isn't cooperating with President Johnson's program to check the outflow of dollars from the U.S. On the contrary, the business community seems to be conscientiously adhering to the Government's behest. Preliminary figures indicate a quarter billion dollar surplus in the U.S. balance of payments for the second quarter of 1965. This surplus is the first since 1957 and provides concrete evidence that the program is working so far. What new investment by U.S. firms in western Europe does mean is that corporations—even those liberally en-
dowed with cash in the U.S.—must now look abroad for the money to support their foreign spending programs. The most desirable place to borrow money for overseas expansions is in the country where the new facilities will be built. "The first thing we tell firms seeking advice on raising money in western Europe is to borrow locally wherever possible," the manager of a French bank explains. Local currency loans are available to U.S. subsidiaries in all countries in western Europe, but interest rates are higher than in the U.S. Annual interest rates for medium-term bank loans to prime companies are about 7% in West Germany, 6.5% in Switzerland and Belgium, 6% in the Netherlands and France, and more than 7% in Britain and Italy, compared with about 4.8 % in the U.S. Long-term rates are higher. U.S. subsidiaries can also borrow from local bond markets in Britain, West Germany, the Netherlands, and Switzerland. Novelty. Higher interest rates are not derailing chemical expansions, however. Du Pont's expansion plans provide an example. To finance its nylon 66 and Dacron polyester plants near Hamm, West Germany (C&EN, May 24, page 35), the firm may have to borrow some of the funds in western Europe. The company neither confirms nor denies that this is a possibility, although it has said that the project will not cause a dollar drain. Borrowing money would be a novelty for Du Pont. It has a very strong cash position in the U.S. and has traditionally shied away from debt financing. Dow Chemical is also giving the problem of financing its western European ventures a great deal of attention. It formed a bank in Switzerland, called Banque dTnvestissement et de Finance, S.A., to handle financial BRANCHES. U.S. branch banks overseas, such as the Amsterdam branch of First National City Bank, New York, lend expansion money to U.S. firms
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transactions for the parent firm and its subsidiary, Dow International, in western Europe. The bank is the third in western Europe in which Dow has an interest. (It owns 40% of one bank and 1.2% of another.) Dollars. Although U.S. chemical firms prefer to transfer to western Europe their own dollars or dollars borrowed in the U.S., they are going along with the Administration's request to cut their dollar outlays abroad by 15 to 20% in 1965 and with its other guidelines set up in an effort to improve the U.S. balance of payments. The guidelines range from asking international firms to use U.S. shipping and airlines to suggesting that they repatriate earned income as soon as possible. There are nine suggestions in all, each designed either to minimize the outflow of dollars or to increase the inflow. The plan is flexible, however, and does permit the transfer of some funds to European subsidiaries. Banks in the United States also face limitations on their foreign lending. U.S. banks, institutional lenders, and investors other than banks were asked in February to hold the level of their foreign loans outstanding to only 5% above the level outstanding at the end of 1964. Foreign bank loans for more than a year were made subject to the interest equalization already in effect on securities. Interest equalization places a tax on purchases of foreign stocks and bonds by U.S. citizens and institutions. In the case of common stocks, the tax is 15% of the sales price. For bonds and bank loans, the percentage of the tax depends on maturity. These limitations work a hardship on both U.S. overseas subsidiaries and foreign firms that have looked to the U.S. for capital. As Dr. Rolf Magener, financial director for Badische Anilin- & Soda-Fabrik puts it, "The day that I can cable New York for $10 million and have it the next morning is gone." Great Britain has also taken steps to correct its balance of payments. Al-
though local loans to U.S. subsidiaries are available, it is no longer possible for U.S. firms to borrow pounds in London to finance ventures in other western European countries. Subsidiaries of British firms operating on the Continent will also find money markets in Britain difficult and will add to the demand for local and international loans in the other western European countries. The result of U.S. and British actions to curb the export of their currencies is that continental Europe will have to provide the funds required to sustain its growth. For the near term, there is no shortage of money on the Continent despite the increase in demand for loans by U.S. and British subsidiaries. Furthermore, a serious shortage is unlikely to develop. As one financial executive puts it, "No government is going to permit a recession to develop because of restrictive monetary policies." In short, companies in France, Italy, and West Germany foresee no problem in meeting their monetary needs for the next five years. They predict that U.S. firms will also find the funds necessary for growth in western Europe. Too Much Money. The problem heretofore has been that there was too much money available in western Europe. France blames an oversupply of money for its 10% rise in the cost of living in 1963. It resorted to restrictive measures to reduce the amount of money in circulation and held inflation in 1964 to about 3 % . Other countries on the Continent face the same problem and have also reduced the amount of money in circulation by various actions of their central banks. The most direct action has been to increase the amount of cash reserves commercial banks must hold. High interest rates discourage borrowing. The central banks, in several instances, have increased the commercial bank interest rates by raising the rediscount rates for eligible paper. Should the supply of money available for loans in commercial banks deteriorate to the point where a recession is threatened, the central banks could easily increase the amount of money available by lowering the requirements for cash reserves and the rediscount rate, bankers point out. In France, the rediscount rate was lowered from 4 to 3.5% in April. Earlier in the year, the French reserve requirement declined from 36 to 34%, which is about twice the U.S. requirement.
International Money Men Talk in These Terms Balance of Payments. This is the difference between a country's receipts from other nations and its expenditures abroad. Local Loans. Capital funds borrowed in the country where the new investment will be made. International Loans. Funds borrowed in one country for use in another. These become a debit on the balance of payments when the funds leave the lending country. Short-Term Money. Money borrowed for 30, 60, or 90 days. The lender is usually a commercial bank. Medium-Term Money. Money borrowed for one to five years, although some western European countries limit the loans to four years and some go up to six years. Lender is usually a commercial bank or savings and loan association in western Europe. Long-Term Money. Money borrowed for more than 10 years. Such funds are obtained by selling bonds and less often by mortgages and notes. Unlike the U.S., pension funds play little part in western Europe as a source of longterm loans. The major source of international long-term financing in western Europe is international bonds. The bonds are purchased by commercial banks, savings banks, insurance companies, and individuals. Capital Market. The amount of money available in a country for short- and medium-term financing. Euro-Dollars. Deposits of U.S. dollars with banks outside the U.S. The banks need not be in western Europe despite the term Euro-dollars and the banks need not be foreign owned. Dollars deposited
U.S. firms may think that 7% interest rates already indicate a capital shortage, but western European corporations have been accustomed to such rates for a long time. The interest rate reached 10% in Italy in 1961. Even with a higher demand for capital, the outlook for interest rates in western Europe is that they will not increase significantly. Rates have even dropped in England and France recently. Otto Schoeppler, vice president of Chase Manhattan Bank in
in U.S. branch banks abroad are Euro-dollars. These U.S. dollar deposits in foreign banks are made by foreign institutions and individuals who received dollars for goods and services and by U.S. companies with surplus cash to invest. Foreign banks, in turn, are free to lend such dollars out, either in short-term (the bulk) or long-term loans. London is the major center for Euro-dollar financing. The total deposits of U.S. dollars in foreign banks, Euro-dollars, is about $7 billion. Since President Johnson's program went into effect in February, U.S. firms and banks have transferred many Euro-dollars back to the U.S. Euro-dollars are becoming increasingly more difficult to borrow for long terms. Interest Equalization Tax. Originally a tax on the sale of foreign stocks and bonds in the U.S. Proposed by President Kennedy and passed by Congress in 1964. The tax amounts to 1 5 % for common stocks and varies with maturity for government and corporate bonds. On Feb. 10, President Johnson applied the tax to overseas loans made by U.S. banks. The tax on bank loans also varies with the maturity of the loan. The effect of these taxes is to curb the flow of U.S. dollars to governments and corporations abroad and thus help the U.S. balance of payments. They apply on loans in all western European countries. Rediscount Rate. The interest rate central banks (analogous to U.S. Federal Reserve banks) charge member banks to borrow money. An increase in the rediscount rate is usually followed by an increase in the interest rates commercial banks charge customers for money. Demand Deposit. A bank deposit which may be withdrawn without notice.
Frankfurt, says interest rates in West Germany are not likely to rise much above present levels in the foreseeable future. Poor Forecasting. While the West German chemical industry is already blaming a shortage of capital for its inability to satisfy the demand for its products, the financial community takes a different view of the cause of the problem. The Verband der Chemischen Industrie (an organization similar to the Manufacturing AUG.
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Chemists' Association in the U.S.) says 1965 will see an enormous increase of imports to West Germany because the present production capacity is not sufficient. It blames lack of capital and the shortage of qualified labor for the undercapacity. Financial executives in German chemical companies blame poor forecasting for the present bind. New capacity to help today's demand in West Germany was planned and financed three years ago, and business has been better than chemical firms anticipated. Another factor affecting the growth of western Europe's chemical industry is the availability of funds from governments. For example, the Italian government has agreed to finance Societa Italiana Resine's new plant for making titanium dioxide via the chloride process when funds are available. Societa Edison, Milan, expects little problem in financing its chemical diversifications since it regularly receives payments from the government for the nationalization of its electrical company. The state-owned giant Ente Nazionale Idrocarburi (ENI) should also find funds readily available. France plans to issue government bonds to finance private investment. Thus, French chemical companies unable to raise money on their own will have access to long-term capital. About 25% of the French chemical industry is state-owned and the government of France can provide longterm capital for the industry's continued growth. French banks have no shortage of funds and have made at least one loan to a U.S. chemical company subsidiary recently. "There's plenty of money in the French banking system," according to one banker. He adds, however, that France doesn't seem to want to export capital through international loans. A member of the board of directors of an association of savings banks in France echoes this view. "Our problem isn't a shortage of funds for local loans. It's that we're in a recession and have overcapacity in many sectors, including chemicals, so there is no demand for capital. We're looking for borrowers," he adds. Obtaining government clearance to build a plant or purchase an existing company in France poses more of a problem for U.S. firms than obtaining loans. No clearances have been granted since January. 54
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Otto Schoeppler Chase Manhattan's man in Frankfurt foresees no big hike in interest
Foreign subsidiaries of U.S. chemical firms seeking international loans (loans made in one country to finance projects in another) will find this type of financing available in only a few countries in western Europe. There are a number of different ways that international loans can be made, however. Commercial banks make short- and medium-term loans (up to four, five, or six years, depending on the country ). For long-term money, bond markets or savings banks are available. Finally, common stocks can be sold. West Europeans hold a $27.5 billion portfolio of U.S. stocks and bonds. Most of these are held by wealthy individuals, banks, and governments. The sale of common stock in the parent company will become an increasingly important means of raising capital in western Europe for U.S. subsidiaries as capital markets on the Continent develop. Medium-term money for U.S. corporations seeking international loans in the amount of $200 to $300 million is available from banks and insurance companies in Switzerland, the Netherlands, and West Germany, Chase Manhattan Bank estimates. In other western European countries, such funds are difficult if not impossible to obtain, the bank adds. Euro-Dollars. Euro-dollars are a relatively new source of long-term international financing. Euro-dollars are U.S. dollars held by foreign individuals or institutions. For example, some of the money U.S. oil firms pay for Middle East and North African crude ends up in London banks where
it is available for financing. Recently some of this money, which heretofore was used for short-term financing only, has found its way into a fledgling European dollar bond market. Interest rates on Euro-dollar bonds have ranged from 5.5 to 6.5%. These bonds generally mature in 10 to 15 years. Chase Manhattan estimates the dollars from Euro-dollar bonds available for private corporations over the next year at about $100 million. In both Switzerland and West Germany, international bond issues can be floated. The German international bond market is relatively new while Switzerland's is highly controlled. There is a long waiting line to borrow in Switzerland, and single issues are limited to about $14 million. The Chase Manhattan estimates western Europe's total issue of international bonds (corporation and government) over the next three years at $600 million, and concludes that U.S. corporations can at best raise between $120 and $200 million, with single issues unlikely to exceed $20 or $25 million from these sources. Savings. The capital market, or money available for long-term investments, in a country depends on the savings habits of its people. Two world wars, government confiscations, and inflation have given western Europeans unpleasant memories of stocks and bonds. The representative of a U.S. bank in Paris explains that "it will take time to build up confidence to go back into paper. People here prefer things, not paper." Real estate investments, savings accounts, and fixed interest-bearing securities are popular with investors. Stock prices on western Europe's major exchanges reached their peaks in 1961, broke sharply in June 1962, and have not generally regained their former levels. Despite the unfavorable trend in common stock prices, the major capital markets of western Europe raised $12.3 billion of new capital (net of redemptions) from all sources last year—a $1.8 billion increase over 1963's total. By comparison, the U.S. capital market raised $15 billion (net of redemptions) in 1964. Opportunity. It's clear that the balance-of-payment woes of Britain and the U.S. challenge the Continent with the opportunity to develop sophisticated capital markets. It's an opportunity that West Germany seems to relish. Evidence is growing that West Germany can become the financial
Here are 6 applications for organotins
center of western Europe. Its corporations have converted much of their debt from short-term to more recession-proof medium- and long-term borrowings. The Deutsche mark is stable, and the German economy is booming. Banks, coiporations, and the stock exchanges are trying to kindle the interest of the man in the street in common stock ownership. Farbenfabriken Bayer in December 1964, for example, recapitalized to lower the price of its common stock and invite wider holdings (C&EN, Jan. 4, page 2 0 ) . West German firms are able now to finance much more of their capital requirements from internal sources (retained earnings plus depreciation) although they still have to borrow more than U.S. chemical firms. West Germany is already the largest capital market in western Europe. Last year its actual receipts from stock and bond issues (net of redemptions) were $3.9 billion, compared to $0.7 billion for Switzerland, $2.3 billion for France, $2.5 billion for Italy, and $1.8 billion for the United Kingdom. The West German financial community expects to do even better this year. With U.S. and British firms now vying with local firms for money, it will have to.
[beautifully illustrated]
BRIEFS Dow Chemical will increase output of its Styrofoam insulation in Europe with a plant in the United Kingdom. Dow already has an extruded polystyrene plant in Terneuzen, the Netherlands, and is building another in Greffern, West Germany. In the U.K., Dow makes agricultural chemicals at King's Lynn, and is building a styrene-butadiene latex plant there.
Do you have another? Chances are it's one in which you are getting some results with another organometallic, or perhaps with a metal soap. But an organotin might give a higher yield, or a more specific reaction, or better coordination. (These are leading reasons w h y organotins are used in the six applications above.)
Chemische Werke Huels, A.G., will build an oxo alcohols plant at Marl, West Germany, to make butanol and ethylhexanol. The plant will begin production in mid-1967 and will have a capacity of 220 million pounds of oxo products a year.
Badische Anilin- & Soda-Fabrik, A.G., West Germany, has acquired the majority shareholding of Chemische Dungerfabrik Rendsburg. Dungerfabrik makes phosphate fertilizers and specialty glues. Its sales exceed $3.5 million a year.
So give organotins a try. Write for data sheets and samples, indicating your interest. We'll send you the most suitable organotin derivatives.
CARLISLE C-81
CHEMICAL W O R K S , INC.
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DEPT.
READING, OHIO
S P E C I A L
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