Acquirer Spring 2013 - Livingstone Partners

DEBTWho is taking the credit?The banks have been criticised for not supporting the SME sector, and last year’sBreedon Report estimated the gap between future borrowing requirements anddebt capacity to be £190 billion. What does this mean for borrowers?Since the collapse of Lehman Brothers, banks have wrestledwith instability in the eurozone, sovereign debt issues andthe weak economy. They have also come under regulatorypressure to strengthen their balance sheets by increasingtheir capital ratios. Banks now need to hold more capital againsttheir loans, with the exact amount depending on the loans’performance and perceived risks. Sectors or loans perceived ashigher risk are more capital-intensive and drive down the banks’returns. To protect their returns and their capital, the banks aretrying to reduce their exposure to these areas.HOW HAS THIS AFFECTED THE BANKS’ BEHAVIOUR?Poor market conditions and depressed asset prices have limitedbanks’ abilities to exit or reduce higher-risk loans. Instead,borrowers were given two- or three-year extensions (‘amend andextend’) and an opportunity to benefit from an anticipated recoveryin market conditions. As these loans come around for repaymentagain, and the economic outlook remains poor, there may be lessappetite to extend. But for the borrowers in the ‘wrong’ sector,repaying or refinancing may not be easy; another bank might beno more enthusiastic to take on the account.As an alternative exit, the bank might sell the loan at a discountto a specialist debt provider. This leaves a borrower building a newrelationship with a party it hasn’t chosen and whose motives maynot be clear.A borrower that can’t refinance can ultimately be forced to sell thecompany in order to repay the bank. This may come as a shock tothe shareholders, particularly if the business is trading well and isservicing its debt, and the timing of the sale may not be optimalfrom a shareholder-value perspective. (See page 20 for more onthese ‘special situations’.)WHAT THIS MEANS FOR BORROWERSFor SMEs, cost of debt is not the issue – availability is. Thosefortunate borrowers judged ‘higher quality’ are still able toDealing with Debt ConferenceThursday 18 April 2013The Soho Hotel, 4 Richmond Mews, London W1D 3DHLivingstone Partners and international law firm Pinsent Masonsare hosting this conference, which will bring together leadingnames and sector experts from the debt, private equity and SMEmarkets to discuss the key trends and forecasts for 2013. Thisevent is for PE sponsors, owner managers, CEOs and FDs whoare responsible for raising or refinancing senior and mezzaninedebt or for managing relationships with credit providers.For further information, contact:Rosemarie LamannoT: +44 (0)20 7484 4700, E: lamanno@livingstonepartners.co.ukraise or refinance debt, but have to be ready for increased scrutiny oftheir business by the lender, lower loan-to-value ratios, lowermultiples of EBITDA, higher fees and margins, shorter maturitiesand longer timescales to complete a (re)financing.WHAT SHOULD BORROWERS DO?Prepare early and prepare well. Don’t assume refinancing or newdebt raising will be straightforward, even if the business is servicingits debt and the relationship with existing lenders appears strong.Existing borrowers need to articulate their plans clearly and startdiscussions with existing and potential new lenders well ahead ofmaturity. Borrowers should also explore alternative lenders. Thereare new lenders coming forward and gaining prominence withmezzanine debt and unitranche facilities. Asset-based lending,which carries a lower capital commitment, is increasingly popularand can help fill a funding gap. With credit still scarce, you needto maximise your options – and chances of success.IMAGE: GETTYWWW.LIVINGSTONEPARTNERS.COM // SPRING 2013 // 23