Copper-bottomed funding

Rob Gilmore of Landsbanki Commercial Finance turns on the credit tap for a West Midlands pipe fittings maker, writes Patrizia Rossi.

It’s hard to imagine that severe snow storms in China earlier this year, which blocked roads, toppled power lines and left millions of travellers stranded could be so closely connected to the fortunes of IBP Group, a Tipton manufacturer and distributor of plumbing fittings.

The blizzards brought provinces across China to a standstill; disrupting copper supplies and causing the price of the base metal to soar. While analysts were upping their copper price forecasts for 2008/09 by an average of 18 per cent, IBP, which produces millions of copper pipe fittings a year was starting to feel the cold.

“Most of our products are made of metal, and the price of copper along with every other metal has risen sharply over the last two to three years. As a consequence, the costs of raw materials and running the business have gone up. This caused us to look around for a more efficient way to refinance the business,” says Trevor Murch, IBP chief executive.

As well as improving cash flow to tackle the spike in raw material costs, IBP was also looking to contract its current funding structure, which was made up of three separate credit facilities – one for operations in the UK, Poland and Germany, and two covering Spain and Italy – making the company’s finances time consuming and complicated for the UK group management. The team thought that consolidating a credit facility for the group’s entire European operations was the way forward.

“We wanted to streamline our credit facilities and put them all under one roof. We felt it would be much simpler to deal with one person and have one point of contact,” adds Murch.

Right on the money

IBP put the wheels in motion and began talks with financial adviser BDO Stoy Hayward in order to find a funder that would be able to consolidate funding and also had expertise in working in a number of legal jurisdictions, in addition to being able to provide additional cash flow, with the possibility of leveraging up where necessary.

This vital cash injection would provide IBP with the crucial funds it needed to buy copper strategically as well as the working capital expenditure to invest in its manufacturing facilities to step up operational efficiency – as well as snapping up an acquisition if the right prospect were to come along.

Led by director Steve Thornhill, the BDO team in Birmingham introduced Landsbanki Commercial Finance (LCF) to the deal.

After some creative restructuring, the ABL team raised £45 million against IBP’s receivables and inventory. The revolving facility gave the £100 million-turnover multi-site operation the option of using credit facility availability in one country to support another within the pan-European group.

Landsbanki CF regional director for the Midlands, Rob Gilmore, says: “IBP’s management told us they spent more time than they really wanted to managing their current finance facilities – juggling cash between the entities to keep the business running.

“They wanted a credit facility that was significantly larger than the funding they already had, which would allow them to concentrate on business strategy rather than the day-to-day cash juggling.

“On top of the revolving facility, there was also an unsecured cash flow piece. Landsbanki CF also provided IBP with a capex line just in case it needs to buy a piece of machinery or to expand a production site, so the company doesn’t have to dip into working capital to buy new bits of kit.”

Pole position

The £45 million refinancing also included an advance against VAT reclaims in Poland worth €2 million (£1.6 million). Although this type of funding wasn’t new to the Landsbanki ABL team, it was one of the first times it had been implemented in the Eastern European nation.

In the past VAT reclaims have tended to be a sporadic activity carried out by lenders with an appetite for risk, or by those who had a strong relationship with the borrower and extra collateral that allowed them to take a chance on a reclaim, says law firm Squire Sanders & Dempsey (SSD), which acted for Landsbanki CF on the deal.

Andrew Knight, SSD director, claims: “There tended to be an assumption that reclaims were high risk – an attitude of maybe it’ll work, maybe it won’t. I think the reclaim in Poland for IBP was a more developed example of the breed. Our approach was – it’s got to work. To this end, we ensured we had a security interest over the account that was being paid into by the Polish Revenue.”

By enhancing protection, the VAT reclaim facility became a more tenable risk for the Icelandic Investment Bank.

Management team

Landsbanki CF’s faith in the IBP management team was key to the refinancing.

“Since Sun European Partners bought a majority stake in the business in 2006, the management has worked hard to drive operational improvement, increase profitability and put the business on a sound footing, which really impressed us,” explains Gilmore.

“The team also understands the market, its niches, and its vision for where it wanted the business to go. This showed us that it was a strong management team – the type of people we wanted to back.”

Since Landsbanki CF’s inception in late 2005, the commercial funder has backed over 80 deals worth more than £1.6 billion and worked with an increasing number of private equity firms, such as Sun European Partners. Gilmore estimates that close to 60 per cent of these deals have involved private equity houses. “We are seen as a complementary debt provider that is investing in growth businesses that can be driven forward and provide a good return.”

Last year, the ABL team managed to write some 40 deals, totalling £1 billion, of which five were signed off by the Birmingham office and worth more than £95 million.

Market turmoil

Gilmore is convinced that a decline in lender appetite, from leverage players and unsecured financiers, compared with last year could bring more ABL transactions to the table. “The cash flow leveraged deals that we have seen on multiples six or seven times EBITDA are no longer happening. This means that a transaction where you can leverage the assets and have a smaller cash flow piece on top will work in an acquisition or a MBO. I think this will bring more transactions into the ABL arena. Landsbanki CF has a strong appetite for these types of deals – the bank is very liquid.”

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