The past 12 months have put an enormous amount of pressure on businesses, especially those operating in the retail and manufacturing sectors. As consumer demand evaporated and banks got tough on loans and overdrafts, the focus for companies has been mainly on refinancing.
Adam Johnson, managing director of corporate lending at GE Capital, says that the period of readjustment, by both companies and banks, explains the scarcity of genuine deal activity this year.
‘July and August were quite subdued,’ he says. ‘It is starting to pick up as the refinancing, restructuring and strategic business shifts that have occurred begin to gain momentum.’
As companies grow in confidence, Johnson expects deal volumes to pick up. ‘We now know that the lack of demand [for commercial finance] earlier in the year was driven by the inability of companies to refinance out of existing funding arrangements,’ he says.
GE Capital – part of the global GE Group, which has its head office in the US – splits its activities between its commercial and corporate practices. The commercial team assists SME and mid-market UK companies with turnover of up to £75 million, while the corporate team has a UK and pan-European remit, assisting businesses with revenue north of £75 million up to £1.5 billion.
Johnson says the facilities offered include invoice discounting, inventory finance and term loans, plus finance against plant and machinery and ‘a small amount of real estate’. He notes that the terms offered by GE haven’t necessarily altered post-credit crunch, but naturally it’s a case of being ‘even more thorough’ when evaluating a client.
Given the dearth of acquisitions, the emphasis has been on refinancing and turnaround opportunities. ‘We like stable businesses that have a good market share and credible management teams, and that have taken steps to address their capital structure,’ he comments.
It’s important that a company seeking commercial finance has a plan for the future and isn’t just thinking about survival. ‘We’re not going to put a facility into place for a business that doesn’t have a future. It’s more a case of a company being restructured and then we come in and are part of that overall plan. We assist with working capital and asset-based finance not only to stabilise a company, but to enable future growth.’
Back in April, the GE Corporate team worked with Ardagh Glass, a company based in Ireland with four production sites in the UK. ‘We put in a £35 million receivables financing facility in the space of three weeks,’ says Johnson.
Although other deals were completed, overall activity has been thin on the ground. ‘A lot of transactions have not been realised because the [numbers weren’t right]. That’s been the frustration this year, to be honest. We have the appetite and the capital to transact and structure for today’s market reality, but other factors outside our control have meant that deals have either fallen away or become protracted.’
The situation should improve next year. Says Johnson, ‘The biggest issue for the buy-out market in particular is valuations. There have been different views on values from incoming management teams and outgoing owners. I think people are getting a better sense of how enterprise values now stack up and the EBITDA multiples you can expect.’
If banks do become more expansive in 2010, there won’t be a return to the over-leveraged, debt-laden deals of days gone by. Johnson fully expects this to lead to a greater demand for commercial finance: ‘Whereas this year has been about tiding businesses over and extending facilities, next year we will see genuine transactions – there will be proper refinancing deals and MBOs will return to the market.’