ASK THE EXPERTS CORPORATE FINANCE RISK AND RETURN What do financiers look for in a potential client? Not necessarily what they’re shown by hopeful borrowers. A common error of small companies is to assume that there is a market for their goods and services. Another – and especially relevant in the aerospace industry – is that cash flow projections based on anticipated contracts will be sufficient to convince lenders. A mismatch of expectation is to blame for much of the friction between borrowers and lenders, say bankers and consultants active in the aerospace and defence industries. The specialist nature of aerospace products and services can mean high development costs, so decisions on how to fund growth require careful consideration. Andrew Garvey, director, <strong>Aerospace</strong> and Defence, RBS, says: “<strong>Aerospace</strong> companies often face the need for up-front investment in tooling, R&D or new products. This typically has to be funded through existing operational cash flows and often with no certainty of winning a contract or the associated revenue. “In short, firms must service the cost of the borrowing while waiting for the return.” The long-term nature of aerospace programmes adds to this challenge: the ‘timeto-payback’ investment on plant and equipment may be 8-10 years whereas traditional bank funding can be uneconomical beyond five years. This mismatch can be a challenge for firms with good opportunities to grow. In reaching a lending decision, RBS assesses each firm’s business case alongside Tackling supply chain finance issues from another angle is the recently-formed AGP (<strong>Aerospace</strong> Growth Partnership) Finance Forum, whose members include representatives of industry, government and finance providers, including four major banks. Dick Martin, managing director of ADEPT-NX and secretary of the forum, says there was a concern that, while increased funding is being made available for research and development, little was being done to ensure the supply chain would have the ability to engage in the results of all this work. The main task of the Finance Forum – not a lender itself – is to identify and recommend affordable and appropriate funding methods for aerospace supply chain companies. “We’re trying to look beyond simple short-term debt finance – beyond the same old product.” 10 MIDLANDS AEROSPACE its borrowing needs. “A company needs to be able to demonstrate that it can repay any borrowing without relying solely on any new contract wins,” says Garvey. Richard Aboulafia, senior analyst with the Teal Group, says current economic pressures mean that finance personnel, more than ever, are “passionately concerned” with the next three years while typically an aerospace supply chain company will have a perspective measured in decades. Aboulafia told delegates to the MAA’s first annual conference earlier in the year that industrialists at every level risk becoming “prisoners of third-party finance”, with their long-term planning and short-term financial considerations on a potential collision course, unless their financiers really understand the industry. From RBS’s point of view, developing a broad and consistent understanding of the industry goes hand in hand with developing good relationships with its customers. Rupert “A company needs to be able to demonstrate that it can repay any borrowing without relying solely on any new contract wins.” Boddington, senior director, corporate coverage with RBS Corporate, Birmingham, says: “When we understand the dynamics of the business and its strategy, we can be clear on what is in the realms of the possible from a bank perspective. Equally we can help look at other aspects of finance that may be out there. It is in our interest to ensure firms can access appropriate finance for their business.” Clive Lewis, managing partner of consultants Achieving the Difference, stresses the need to prove to financiers that the market really will grow as they anticipate. Anecdotal evidence suggests that independent market data to support the borrower’s claims of future demand “give more confidence to the lender.” Lewis says that while bank finance remains the first choice for most companies, alternatives such as crowd funding can be “a low-cost way of getting very small amounts”. Such an approach could work well for startups or companies seeking an easy way of giving employees a stake in the business. From the SME point of view, particularly where the owner may take the role of MD, finance director and sales director, their banker’s overall knowledge of financial markets, including alternative ways to fund growth, is extremely important. For example, the Business Growth Fund may be appropriate in situations when a growing firm could benefit from a discussion around equity funding. LOOKING FOR AFFORDABLE, APPROPRIATE OPTIONS The forum gives the space to tackle difficult financial issues in an open and honest way. What is a typical ‘difficult issue’? It could be how to resolve the predicament an SME finds itself in when the small print of a new 10- year contract gives its customer the right to re-tender in the second year of the contract, which is an unacceptable level of uncertainty to the bank from which it needs a long-term credit facility. “If we’re determined to make the future better, keep our aerospace manufacturing and even bring it back into this country, these are the sorts of reviews that have to happen,” says Martin. The forum’s efforts have already led to a number of improvements. One of them is the recognition that the industry needs special attention. Barclays and RBS, both members, are now moving to put teams of aerospace specialists in place.
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