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Exploring all options
28 January 2009
Despite the current economic climate, the banks are still
willing to lend money to corporates, provided the business has a
sound business plan and the level of gearing is moderate.
Deals are still getting done, but at a slower pace, higher price
and at lower volumes. The liquidity issues remain for the
banks. They clearly have concerns about the economic outlook
and how this will translate into increased levels of bad
debts. Also, despite the Government re-capitalisation
of certain banks, there are still bank to bank lending
issues. As a result, the banks continue to ration lending and
this is likely to continue for at least the foreseeable
future. Corporates need to react to the trends in the
market and perhaps consider how they need to alter their financing
arrangements going forward.
More Club Deals
One way in which a corporate could secure funding for their
strategic growth plans is obtaining funding for two or more banks
(“club deals”). It is likely for larger acquisitions that
club deals will be the most likely funding structure given that the
syndication market is almost at a standstill. Banks are
unlikely to want to underwrite the entire credit risk on larger
deals and the banks will be keen to spread their risk. Even
for general funding (e.g. working capital) we see that bank clubs
will become increasingly popular as incumbent banks may not have
the appetite to extend or continue existing funding
lines.
Increased Pricing
There has inevitably been a push back on the more favourable
funding terms available in 2007 and early 2008. Banks are
increasingly focussed on achieving the right returns on capital
(particularly following the introduction of BASEL II) and in the
current market this has meant higher pricing and shorter
lends. On the acquisition finance side, this has also
affected the amount at which the banks are prepared to lend on a
cashflow basis (three times EBITDA seems to be the maximum).
Deal structures have also been affected (for example vendors having
to defer more consideration fully subordinated behind the bank than
they previously did).
The banks are also more interested in the over-all returns they
receive from their relationships (e.g. through ancillary
facilities, hedging etc). It is also likely that
facilities which are available but not being drawn may be withdrawn
unless the bank recovers through significant non-utilisation fees
or is happy with its over-all return from its relationship.
With regard to hedging, many businesses are currently having to
pay fixed interest at well above market rates under hedging
investments entered into over the last couple of years when
LIBOR/Base Rate was much higher. In some situations such
hedging investments can be re-structured to the corporate’s
benefit, but this is not always possible. There is though, a
“flipside” to this – with interest rates at historic lows, now is a
good time to take out new hedging terms.
VC Funding
There is still some potential in the market for venture
capitalists to fully underwrite acquisition finance deals without
bank funding being in place on completion. The venture
capitalists are only likely to provide this “equity bridge finance”
if they are comfortable that they can refinance with the bank later
or (less likely) the venture capitalist is happy to provide longer
term debt. In any event, this deal structure is only likely
to apply to certain deals and for most other deals, debt funding
will need to be secured on completion.
Asset Based Lending
Credit constraints have made it increasingly difficult for the
corporates to obtain finance from traditional funding
methods. It is likely that the asset based lending industry
will continue to provide an important role in supporting businesses
during the recession. To secure finance, businesses may need
to speak to asset based lenders to obtain funding (either alongside
its incumbent bank or as its sole funder).
Dialogue with Banks
In conclusion, funding is still available for businesses
provided they have a sound business plan, albeit that it is likely
to be at a higher price and on less favourable terms.
Businesses should consider whether to bring another bank on board
as well as their incumbent bank, especially if the incumbent bank
does not have the appetite to extend or increase the current
facilities. This is also relevant even in relation to
syndicated facilities, where corporates may consider bringing
bilateral facilities alongside to give more flexibility.
More than ever, corporates need to be speaking to their banks
and other funders, well in advance of their facilities coming to an
end, in order to ensure that future funding is in place.
Finance directors need to be sure that they produce management
accounts, cash-flows and forecasts in a timely manner and ensure
that those are based on reasonable assumptions. If a business
is showing signs of struggling it is far better to begin a dialogue
with the bank at an early stage rather than leaving it too late,
which may reduce the bank’s options. An early stage dialogue
will allow the bank to consider a wider range of options (e.g.
re-setting financial covenants, debt/equity swaps etc). A constant
dialogue with the banks will only assist corporates in the future
with obtaining funding.
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