The future of debt funding
We all know a crystal ball never gives certainty, but for now most people involved in providing or advising on corporate finance are finding it hard even to look beyond the first quarter of 2009.
The Bank of England’s recent Credit Conditions Survey reported that banks tightened credit availability in the final three months of last year and it is widely acknowledged that securing funds has been even more difficult in the first quarter of 2009. Many funders are restricting new lending in an attempt to strengthen their balance sheets, but unfortunately this caution is also being applied to renewals of existing facilities. As a result, there are likely to be an increasing number of defaults during 2009 which will, counter productively, weaken those same balance sheets they sought to strengthen.
The vicious circle has to be broken and we all hope sooner rather than later, but it will take a brave funder to start lending whilst there is so much uncertainty in the economy. Even the support offered by government backed securities appears to have had little effect so far.
So what impact does all this have on the entrepreneurial business? Smaller deals and acquisitions of distressed companies may continue to flow for those with cash reserves. Defensive mergers and share-for- share exchanges may also be a feature of 2009. However, debt-laden businesses are now starting to concern themselves with negotiating a renewal or extension to their existing debt facilities. Where previously it was the borrower who dictated the terms of a refinancing and had a wide choice of funders, the tables have now been turned. As a result, proposals to banks need to be more ‘watertight’ than before.
The cost of borrowing, both in terms of fees and rates over base (or more likely LIBOR), remains high despite repeated cuts in the Bank of England base rate. Most funders remain cautious about their lending portfolio, especially highly geared owner-managed SMEs and businesses showing signs of suffering in the recession. As credit conditions continue to tighten, businesses are finding that the renewal or refinancing of existing debt facilities is becoming increasingly difficult. The future of debt
At this time, it’s a good idea to stay close to your bank for their continued support, and to stay even closer to your advisor. Provide regular, timely management information and refresh business plans, projections and cash flow forecasts, all of which CLB Coopers can assist you with. If your funder starts to exert increased pressure, it may be appropriate to consider your options for restructuring the business’ debt, for example the conversion of a portion of the debt into equity.
The Corporate Finance Advisory Team at CLB Coopers are here to help if you require any assistance in exploring restructuring options.
Call Graham Rigby on 0161 245 1000 or email grigby@clbcoopers.co.uk to discuss your options.