The icy relationship between banks and entrepreneurs shows little sign of thawing. Business owners remain frustrated by the way financial institutions are averse to risk-taking of any kind, often only offering credit on the most unattractive terms.
It’s not a tenable state of affairs. Well-run companies in need of extra headroom are stagnating and, when it comes to financing M&A activity, sensible deals are needlessly falling by the wayside. Larry Weiss, CEO of Bank Leumi (UK), a subsidiary of the Israel-based Bank Leumi, regards this perceived failure among the larger institutions as an opportunity for a niche lender to both fill the liquidity gap and boost market share.
‘Our parent company did not get burned by the credit crisis,’ says Weiss. ‘As a subsidiary, we do not have the problems of some of our competitors where all of a sudden the subsidiaries of the parent have to dispose of their assets. We feel this is an opportune moment to grow the business.’
Collin Cumberland, head of corporate and commercial banking at Bank Leumi (UK), observes that the organisation didn’t expose itself excessively to bad debt. ‘A lot of the problems with the UK banks came out of their property portfolios. We never chased the market with the 80 per cent to 90 per cent loan to values that a number of banks were undertaking.’
Add it up
The financial results posted in 2009 tend to back the view that the bank has capital and liquidity ratios in line with what has been stipulated by Basel III.
Established in London in 1902, Bank Leumi (UK) now has assets of £1.4 billion, a lending book in excess of £1 billion, capital of £150 million, and customer deposits and assets under management of £1.2 billion. The strength of Bank Leumi Group is ranked internationally by The Banker at 149 by tier 1 capital, and at 153 by assets.
Despite a prudent approach to lending, Bank Leumi (UK) has not been immune from the effects of recession on its clients with an impairment provision of £17.7 million due to ‘a small number of specific customer situations’. This did not deter the bank from continuing to lend. A separate risk management department was established to implement the latest techniques of credit assessment, review and monitoring. The new department worked very much alongside the corporate teams to get deals done. At the operating level, income rose by 19 per cent to £46.4 million and pre-tax profits to £3.2 million. The overall balance sheet remains strong despite the wider market conditions.
As the market opens up, the focus now is on winning new clients. The bank has 200 staff in offices in London, Leeds, Manchester, Brighton, Birmingham, Reading and Jersey. At present, approximately 17 per cent of revenue comes from commercial finance, 13 per cent from commodity finance, 15 per cent from its asset-based lending division, Leumi ABL, and 30 per cent comes from property finance. The balance comes from Private Banking, a re-established media finance group and other activities.
Weiss states that each division is seeing the benefit of higher demand, none more so than the asset-based lending division, which operates as a subsidiary of Bank Leumi (UK). Although much of the work stems from companies looking to refinance, there is also an encouraging amount of M&A transactions which need ABL backing in order to go through.
Phil Woodward, MD of Leumi ABL, says: ‘There is genuine M&A activity out there. Venture capital firms are looking to invest in companies, particularly in turnaround situations. Some larger businesses too are eager to dispose of non-core divisions and that can lead to trade sales and buy-outs.’
In short, it’s the return of distressed M&A. ‘The strategic M&A work hasn’t been buoyant but it’s the accelerated M&A work that’s out there keeping the venture capital firms busy. A number of firms are buying household names and turning them around.’
Leumi ABL provides between £1 million and £25 million to companies through the traditional suite of ABL services, such as invoice, inventory and plant and machinery finance. It also works closely with Bank Leumi (UK) on deals, whereby its commercial banking division can provide working capital, credit facilities and property financing.
‘The bank can get involved right at the start of a transaction in respect to providing trade finance,’ comments Woodward. ‘This helps the additional working capital requirements of businesses that need to go out and purchase goods. In turn, this flows through to the facilities which we can provide.’
Paul Hird, the CEO of Leumi ABL, says that a recent deal with aerospace company, Mettis Aerospace, demonstrates how the various strands of the bank’s services can be pulled together. Based in the Midlands, Mettis is backed by the venture capital firm Chamonix Private Equity, which acquires companies from other professional investors and VC firms.
Mettis, which has sales of £70 million, needed extra headroom and so Leumi ABL provided invoice discounting, and financing against stock, plant and machinery, while Bank Leumi (UK) arranged finance against property to enhance the long-term working capital of the business.
Likewise, Beeswift, a West Bromwich-based wholesaler of corporate clothing, work-wear and personal protective equipment, received a £6.5 million financing facility from Bank Leumi (UK). This included trade finance, stock and receivables funding, foreign exchange and cash management. It also refinanced the existing financing arrangements, whilst at the same time producing additional working capital to help the business.
Fleet of foot
Woodward is keen to point out that one of the advantages of being a smaller organisation is that the financing for these types of deals can be put together speedily. ‘Reporting lines are short for us, which means that both parts of the business effectively knit together as one as the deals come to one UK credit committee.
‘We look at a business holistically. We don’t have one division who meets the management team and another, separately analysing the merits of the business. We join forces right at the start as we assess how to best manage the proposition for the client.’
The Leumi executives argue that this stands in contrast to the larger financial institutions with their elusive, enigmatic credit committees. Weiss, an American who earned his stripes working for The Chase Manhattan Bank for 12 years before spending 18 years in senior positions in a natural resource trading company, says: ‘Throughout my entire career I’ve seen that as vital as it is to undertake a credit analysis, it’s also extremely important to meet the individuals you are dealing with and make a direct assessment.’
Weiss is quick to clarify that if business is being won from competitors, it doesn’t mean that Bank Leumi and Leumi ABL should be seen as soft touches for gaining finance. ‘We will not finance a company’s equity,’ he says. ‘People need to be committed and have fire in their bellies, but once you get through our organisation’s door we feel very strongly that we want to work with clients on a long-term basis.’
Woodward concurs. ‘We aren’t cavalier but we do take time to understand a business and get underneath its skin. We’re really looking for businesses with a good plan, good product and good management. If they have this then we can give them additional confidence by allowing then to have the headroom to move forward.’
Working with VC and mid-market private equity firms
Of course, the current environment means that companies which meet the triumvirate of plan, product and management can be hard to find. This is where working with VC and mid-market private equity firms can be useful, as they will be providing a sound indicator about the quality and long-term ambitions of a business. ‘There are a lot of deals floating around and some of them do have their flaws. The VCs we speak to are a good filter as if the deal stacks up then a number of VCs and PE houses will be looking at it.’
Encouragingly, the volume of deals which do ‘stack up’ is increasing, which is fortunate as many of the VCs need to make investments as the clock is ticking on funds raised in 2007-2008 which have been sat on for the past 18 or so months. It’s a case of use the funds or return it to investors.
Interestingly, Woodward comments that the financial dynamics of deals has changed when backing VC-led buy-outs. ‘There is now a tendency for the firm to bridge any gaps in a deal with their own funds. A few years ago it was very much a case of them stating what they were prepared to invest and we were expected to provide the rest. We were almost incumbent to put a level of mezzanine finance in; that’s no longer the case.’
The economy will be a clear driver of whether deals will continue to pick up and what kind of transactions they will be. While Weiss and Hird believe the UK may be heading for a double-dip recession, Woodward stands by his view that the economy will continue in its current state. All agree that conditions are not going be any easier for management teams and that will create pressure points for companies in the year ahead.
Hird says: ‘If there is a double-dip, that creates volatility, which in turn creates rationalisation and synergistic opportunities. There will be a lot more distressed M&A.’ Weiss goes as far to suggest the UK is already in recession. ‘The re-introduction of Quantitative Easing that will happen in the US will happen here as well,’ he adds.
Interest rates need to be watched carefully, says Woodward. ‘If they start creeping up as well that will lead to more transactions as many companies are just about washing their faces at the moment because the rates are low. As soon as there is a shift in rates then companies will become stretched and [the larger] banks will be forced to take action as opposed to closing their eyes and covering their ears.’
Woodward expects the number of deals worked on this year to be round 60 in total and believes the volumes will be similar next year. ‘It’ll be refinancing and distressed transactions. The buying of value is some way off until the larger secondary market comes back.’