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finance market develops and innovates in the continuing tighter economic environment

22 November 2012

We are seeing some important changes in the finance market through the recent deals our teams have worked on, with the market continuing to operate tightly in light of the continuing market conditions.

Growth / mezzanine finance for SMEs

To assist growing SMEs get to the next stage without giving up equity Santander, through their Breakthrough Growth Capital Fund, are providing mezzanine finance. We advised on the first Santander growth capital deal in the Midlands which saw £1.5 million of the total £200 million Santander Breakthrough pot being lent to Ridgway Machines Limited - a Leicester-based engineering company - who will be using the money to help grow its business overseas.

Santanders Breakthrough funding is supported by the Governments Regional Growth Fund, which is being supported by RBS, Lloyds TSB and HSBC amongst others.

The Government and various leading banks have also recently launched the Funding for Lending Scheme. This is the latest attempt to boost bank lending to the residential mortgage market and to businesses, especially SMEs.

Under the scheme the participating banks will borrow from the Bank of England at low rates and then on-lend at 1 less than their normal interest rates and without any arrangement fees. There are some conditions attached to this scheme (for example it does not apply to loans to businesses in the financial sector) but it does seem to have some real traction.

In addition, Cambridgeshire County Council Pension Fund and Trinity Hall have launched the new Leicester-based bank Cambridge & Counties, which offers property loans of between £50,000 and £1 million specifically to small businesses, with a particular focus on those in Leicestershire, Cambridgeshire and Northamptonshire. This is a specific example of the wider trend which has seen certain local authorities providing facilities to support businesses in their community.

So overall it seems the much talked about SME focus is starting to gain momentum across the banking sector.

Invoice financing including cashflow lines 

Asset based lenders/invoice financiers have previously stretched the funding they have been prepared to make against a companys collateral base (for example receivables on stock) by providing cashflow lines. Over recent years these had all but disappeared but we are now seeing them re-emerge on transactions. Therefore, if a company has a customer base with strong and established corporates, this can open up additional funding to get a transaction away that may have otherwise stalled.

LTVs 

We have seen that certain banks are prepared to lend up to 70 of LTV for strong corporates rather than the lower market standard (55-65) - thus increasing quantums and the opportunity to get deals away, especially in the real estate finance sector.

Light touch development finance 

We have seen instances of banks being prepared to provide a development finance facility without the usual tight controls on property deals - for example the appointment of a monitoring surveyor to protect the banks interests. Specifically, the developments involved a substantial refurbishment to an existing property and a residential development by a regional house builder and, in both cases, the light touch monitoring helped the bank secure the transactions.

Insurance companies and institutions as lenders 

With the under-performance on equity markets, insurance companies and institutions are following their US counterparts and entering the European real estate debt market for a healthier return from commercial mortgages. This is helping to fill the debt gap left by the banks as they deleverage in this market.

Supplier finance

This is an emerging form of finance that we have seen in recent transactions. Essentially, it is a form of invoice finance, with the funding being available to the customer rather than the supplier. As with typical invoice financing, the supplier is paid a percentage of the invoice value when it is issued (approximately 80) rather than having to wait for (for example) the 90 day payment period to expire, which provides great cashflow benefits. This type of finance is well suited to where the customer has a strong covenant and can therefore raise the invoice funding when the supplier is unable to do so. The cost of this finance to the supplier is then deducted from the payments due under the invoice.

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