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Raising finance in these turbulent times
09 September 2008
The ‘true’ picture of deal activity for the first half of 2008 is
starting to emerge within the general corporate arena. In the early
part of this year deal flow remained high in the Midlands as the
market remained resistant to the initial effects of the credit
crunch. Additionally a considerable number of deals were
completed in March and April prior to the introduction of new CGT
rules.
It is though clear that corporate activity in
terms of transactions in the region has slowed markedly since the
spring. The Chamber of Commerce has recently predicted that
the British economy will experience a recession within
“months”.
What of the current corporate finance
market? Raising finance, be it for expansion through
acquisition, capital expenditure or working capital, is a different
ball game compared with twelve months ago. Lenders are
generally more cautious in making their credit decisions and
requiring greater levels of due diligence. Funding is
available to the right type of borrowers but typically pricing
levels have increased in the region of 0.75% - 1% above levels 12
months ago and most loans are now being linked to LIBOR rather than
the bank base rate. It is certainly true that lenders are
focussing on more certainty as to their exposure and return.
As pricing is such a key issue for banks in
these credit crunch times, certain banks have introduced an
additional layer to their credit committees which specifically
signs-off on pricing.
The banks’ reluctance to underwrite large
amounts of debt and the difficulty in selling down debt in the
secondary market has meant that the majority of recent sizeable
deals in the region have been clubbed deals. Recent examples
of these include the Johnsons Cleaning deal which involved a club
of four banks (RBS, HSBC, Barclays and Lloyds) and the Danwood deal
(Barclays and RBS). It seems that most sizeable deals in the
region will, at least in the foreseeable future, involve a club of
banks as banks seek to spread their exposure.
Venture capitalists continue to have appetite
to do major deals but currently the major stumbling blocks include
senior debt levels and vendors’ price expectations.
Another trend in the market is the growth of
assets based lending (ABL). With the comfort of the
collateral for the lender, the borrower may more easily raise
funding by way of ABL and enjoy competitive rates compared with
term loan facilities. Asset-rich businesses clearly have an
advantage here. The increase in ABL activity is another sign
perhaps of the certainty that lenders seek during these turbulent
times.
There is also potential for more take-private
activity with the stock markets at historically low levels. Where a
listed company has a strong asset base, which may mean that its
asset value is greater than its market cap, this opens up
opportunities in particular for asset based lenders to fund
take-privates.
There are of course certain sectors which are
hardest hit in the current climate, including the construction
industry and the retail sector, who are reporting challenging times
at present. Even more worrying are future predictions that
things will “get worse before they get better”. For
businesses in these sectors the options available to raise finance
may be limited. However, where the company can demonstrate a
high calibre management team and a sound business plan lenders may
be willing to lend albeit with more caution, more strings and at an
increased cost.
At present the corporate finance market and
insolvencies are in a kind of limbo with both showing moderate
levels of activity. It will be interesting to see in Q4
whether confidence in the market place improves with a consequent
improvement in corporate finance deal-flow or whether more
insolvency/restructuring activity unfolds as market conditions
tighten.
There are clearly at present strains on
businesses’ cash-flows due to increased costs of inputs (the main
ones being increases in energy and fuel costs) and the drop in
revenue for many businesses as consumers, both individual and
corporate, look to tighten their belts. Business opportunities
arise even in challenging economic times and so against this
backdrop the end of the summer may see a period of increased
corporate activity.
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