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Czech firms venture for capital By Robert Patton CNB tries to boost economy with interest rate cut, but banks still are not lending Pavel Rehak, whose family has put him in charge of finding new funds for its toolmaking business, is in a bind. "To stay competitive, we need to invest in new technology," said Rehak. 23, "But [the bank] doesn't want to give out money." So even as he seeks a loan, Rehak said, he is exploring other options to obtain the nearly 750,000 Kc ($25,000) his company needs. The Rehaks founded Adonis in 1991. The business makes metal handtools for construction companies. In 1993 and 1996, Komercni banka loaned the company sums roughly equal to what the company is now seeking, and Adonis paid the bank back on time, Rehak said. "But loans are more expensive now and much harder to get," Rehak said. That's true even for customers, such as his family, with a good credit history, he said. One temporary way around that is leasing. Adonis recently obtained new capital under a lease-to-own arrangement, Rehak said. Intensifying competition from foreign handtool makers, however, makes it crucial for the Rehaks' business to improve and expand its toolmaking technology, he added. That means finding cash. Rehak's quandary is a familiar one in the Czech Republic, said Juraj Cernicka, managing director of the Expandia Finance brokerage and head of its corporate finance operations. Small businesses seeking new funds are "incredibly squeezed," Cernicka said. Czech banks, staggering under a mountain of bad loans, simply aren't lending money, Cernicka explained, and most small businesses can't obtain loans from foreign banks. With a one-point cut in its key interest rate Nov. 12, to 11.5 percent, the Czech National Bank (CNB) has lowered the rate by 350 basis points since July. But economists say that still is not spurring new lending from the skittish commercial banks. The current situation has its roots in Czech banks' loose lending practices in the first half of the 1990s, Cernicka said. "Czech banks were willing to finance virtually everything," he recalled. Debtor after debtor defaulted, however. Bad loans now make up more than a quarter of all loans on Czech banks' books, according to the CNB. As a result, Czech banks are now as stingy as they once were generous -- an overreaction, according to Cernicka. The ease with which companies could find bank loans in the early 1990s was also among the factors that hindered the development of the Czech capital market as a place to raise funds. So far, only one company, Software602, has successfully raised funds with an initial public offering. That is the climate Rehak faces as he searches for money for Adonis. If Komercni banka does not come through, Rehak said, he could conceivably seek a venture capitalist -- an investor that buys a stake in a small or medium-sized concern, plays an active role in the business, then, typically, sells the stake after three to five years. "But venture capital is very hard to find," Rehak said. That point is seconded by Radek Lastovicka, investment manager of the Risk Capital Fund (FRK). Funded by the European Union's PHARE program, FRK is the only venture capital firm in the Czech Republic that invests in firms seeking less than 3 million Kc, Lastovicka said. FRK has received hundreds of applications for funding since it began doing business in 1995, Lastovicka said, but it has financed only 10 projects. Venture capital financing is growing in the Czech Republic but still takes place on a very small scale, according to a survey conducted this spring by the accounting and consulting firm PricewaterhouseCoopers and the Czech Venture Capital Association. That survey identified only 61 venture capital investments in the Czech Republic, but the survey's authors said "almost all" the investments had been made since 1994. Another increasingly common way businesses can bypass tightfisted Czech banks is by going to the banks' counterparts outside the country. Many stronger large and medium-sized firms "are more and more looking to foreign banks," Cernicka said. Indeed, the volume of loans to Czech firms from foreign banks increased by 15 percent last year, while the volume of loans made by Czech banks increased by 1 percent -- that's actually a contraction, after adjusting for inflation. But most foreign bank loans go only to export-oriented firms or companies whose customers are well-known, reliable domestic companies, Cernicka said. Recent downgrades of the Czech Republic's credit rating by international ratings agencies such as Standard and Poor's will make it even more difficult for firms to get foreign loans. Adonis almost certainly won't get a loan from a foreign bank, Rehak said. But it may find a foreign firm in its line of business willing to buy into the company. This, Rehak said, is probably his most promising option if lending falls through. That strategy worked for Ivan Kocmanek, who runs a small corporate debt collection agency that is a subsidiary of the German debt collector Kasolvenzia. "The easiest way for Czechs is to find someone who will invest the money from the West," Kocmanek said. For foreign firms that want to expand into the Czech Republic, too, it is often easier to buy into an existing concern than to start from scratch, he added. Foreign participation in his company has made it easy for Kocmanek to get money from German banks, too. "I can borrow money at 6 percent interest," he said. "If I had to borrow money from a Czech bank, it would be 12, 14, even 20 percent, since I don't have any property to put up as collateral. "On the other hand," he added, "Kasolvenzia is not my company; it's owned by Germans." But a foreign company looking to buy into a business is not easy to come by either, Kocmanek pointed out. "For small businesses, this is difficult because people usually don't know languages, they don't know the right people and they don't have trust," he said.
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