Corporate Restructuring

Refinancing in a credit crunch environment

Not having the right financing in place can be a real problem for a business. There are tangible problems, in terms of an unnecessarily expensive interest rate and insufficient working capital, but there are also intangible problems as well which are perhaps even more important, in that if the relationship has deteriorated with the lender then you no longer have a lender that supports the strategic vision of the business. Refinancing can dramatically change that situation by bringing in a new lender who will take a different view and give you the flexibility in your finances to allow you to achieve your strategic goals.

The press coverage around the credit crunch is really in one particular area of the market - it’s in large-cap leverage loans. Down at the smaller end of the market in the mid cap, and that really goes all the way up to about £600 million of debt, the position is a bit different, there are specific features of the top end that make that end difficult and closed, but in the mid market that’s not the case, we are still seeing lots of activity in the mid market; There’s a refinancing that I am working on that is completing at the moment for a business in restructuring where we had two very competitive offers from lenders, so plenty of activity there.

The key to getting the right debt financing for your business is to understand what different types of lenders are offering and then find the right type that suits your business. For example, if your business is asset rich but cash flow poor, then an asset-based lender, who lends primarily on the quality of the asset base that’s securing the loan, will take a very different view of your business from a traditional clearer who lends on a cash flow basis. There was a recent refinancing that we worked on whereby bringing in an asset-based lender who was able to take that different view, we cut the debt service cost by 60%.

Long-term banking relationships are important, but one thing to bear in mind is that if you have a problem on your loan, if you have a default then responsibility moves from the relationship manager, with whom you may have been dealing for years, to the workout area of the bank. If you have a covenant breech and your loan goes into workout, expect to see significant fees in order to remedy that breech. There was a recent case that we worked on where fees of 10% of the total facility were being charged, but we were able to come in, bring in a new lender, who actually doubled the working capital that was available to that business and also cut the debt service costs.