Paul Mason, corporate finance director with Mazars Scotland
It's certainly true that 2012/13 will continue to see significant refinancing activity and the rapidly changing landscape for borrowers has already been well documented by those of us who are active in the market.
We have seen many larger companies completing refinancing's, particularly those with appointed non-executive directors and/or institutional shareholders, both of whom have been instrumental in encouraging early refinancing as a way of delivering certainty even if it incurs additional costs.
As those who have recently been through the process will agree, refinancing in this new climate isn't a pain-free experience. Firstly, it will incur incremental costs: the aggregate effect of arrangement fees; higher margins;advisory, diligence and valuation fees. Secondly, the process itself will take longer and will be more onerous. Thirdly, facility structures will, in many instances, be more constrained for the borrower, both in terms of their nature term loans requiring regular repayments instead of rolling overdrafts and less (or no) committed but undrawn headroom as well as stricter financial covenant tests.
Whilst these are all factors that no business will welcome, the case for delaying the inevitable is, in my opinion, a flawed one: the environment is not likely to become more benign and, if anything, may tighten as continued refinancing activity bites further into banks available capital and liquidity.
So what does this mean for businesses aiming to refinance in 2012? To begin with, historical relationships with your existing bank may no longer carry you through relationships of course remain important but your existing lender may no longer be your best option.
All relationship managers have to operate within the policies and structures determined by that bank, which may result in that lender having less appetite for your proposition than would be the case at other banks. Each lender faces its own challenges and deploys its capital in different ways. It's vital to understand and to review your alternatives before embarking upon a course of action.
Even if you do remain with your existing bank, you may find that your relationship point of contact has changed. In any case, building an ongoing, strong relationship is important and should be one of the targets of any refinancing exercise.
One feature of the current banking market that becomes apparent as soon as one engages with the market is that different banks have different 'appetites' and these appetites can change periodically.
In extreme cases, this could mean one bank wont be interested in any new proposition in a particular sector, but this doesn't mean all banks will have the same view. So it's important to understand which banks are active in what areas and remember, different parts of an individual bank can have different views. It's not a 'one size fits all' and research and external guidance will benefit your business.
It's also worth recognising that banks can have a different approach for commercial lending versus corporate, i.e. SMEs versus larger or listed companies.
Many media headlines focus on larger financing's that typically fall into the corporate book, whereas for many SMEs, the banks appetite for commercial lending is more relevant.
It shouldn't be surprising that companies operating in different industries may well receive differing levels of interest from banks. This is for two reasons:some sectors are obviously in less robust health than others; and certain banks have excess exposure to sectors that will limit their appetite to take on new lending in that same sector. However, the old adage remains true: a good operator in a tough market is usually a better proposition than a weak operator in a strong market.
There are many other factors that will affect lenders appetites, including the level of security and capital efficiency of the structure; the geography of the borrower (and the team within the bank); future perceived refinancing risk;and the degree of financial leverage.
Fundamentally, banks breakdown their business in different ways and devolve decision-making and policy to different extents. It's necessary to understand which banks and teams within each bank might be most receptive to a particular proposition.
We should also not forget that banks are, themselves, resource-constrained. You give yourself the best chance of success by tabling a proposal that's been well thought through and is already feasible from their perspective. Banks can and will structure the propositions themselves, but you stand a better chance if you enter into discussions with a credible suggestion from the outset after all, you understand your business better than anyone else.
With the tidal change in the borrowing landscape, the possibility of failing to refinance will, for some companies, be the elephant in the room.
Clearly, in this event,the consequences can be serious. If you believe this may be the outcome for you, the first step is to establish whether capital is available from another source. Start this process early and approach the wider market with a coherent and well-developed proposal,including a structure that works for you and all of your current and prospective funders.
Actual or prospective failure to refinance will mean that pressure may be applied to dispose of assets or parts of your business; and streamlining your business, process improvements and independent business reviews may be insisted upon. This will be a challenging time but 'sticking your head in the sand' is not a viable approach.
In addition to reviewing your financing, you should also take the opportunity to look at your business operations from a new angle. Arrangements with suppliers and customers may be legacies of the past but are they still appropriate?
In some instances, other parts of the supply chain maybe sources of finance themselves or, conversely, significant consumers of working capital. How do these relationships and requirements change over the year and can you do anything to optimise your position?
Looking ahead, what are the key messages? Banks aren't just saying 'no'; however, this is a competitive environment and you need to know the rules of the game. Speak to others who have been through it as well as advisors. Understand the new parameters and availability of capital: what is out there and what will it cost both financially and operationally.
And remember: your competitors might just be saying 'no' to their own investment decisions because they assume financing falls into the 'too hard' category. Even though financing is less available than it once was doesn't mean you cant turn current knowledge to your own competitive advantage. Businesses should still consider growth opportunities that are expected to deliver a risk-adjusted return over and above the costs of any new financing required.
Paul Mason is Corporate FinanceDirector for Mazars in Scotland.