Not so long ago, refinancing your business was as easy as ordering fast food. How times have changed. Robert Tyerman looks at how businesses are readjusting their balance sheets to enable transformative growth
Refinancing, if successful, can transform a company, not only by providing the funds it needs on terms which are not going to choke it, but also by opening a relationship with sources of support, expertise and useful contacts.
These sources could be business angels, bankers, venture capitalists, private equity specialists, lawyers or accountants, who, though they certainly want their pound of flesh, can play a crucially beneficial role – if you get the appropriate deal.
Right now, getting the acceptable terms and conditions can be no mean feat. That’s not to say it’s impossible, provided a company has thought ahead and has a sufficiently attractive and realistic business proposition. The catch is that you’ll have to accept much tougher terms than would have been offered a year ago.
Matthew Meadows, a partner at accountancy firm Kingston Smith, says: ‘Companies in the two years before the credit crunch got very good deals. Banks would lend up to five times earnings before interest, tax and amortisation over six years. Now, it’s two times over three to four years and many of the big banks have withdrawn into their shells.’
Those organisations supporting refinancings have toughened their lending terms and are now demanding a margin over LIBOR (the London Inter Bank Offer Rate, the minimum rate at which banks lend to each other), rather than the lower Minimum Lending Rate set by the Bank of England.
Meadows cites a marketing services company in Bristol, needing £500,000 debt, twice its cash flow, to help fund an all-important acquisition. In this case, the company being acquired was persuaded to take the £500,000 over five years and has, in effect, become ‘the banker’ of the deal.
Others arranging refinancing deals echo this experience. George Sampson is the CEO of Buckinghamshire-based APA Parafricta, a maker of low-friction fabric to protect medical patients against bedsores, leg ulcers and other hazards. The company, founded five years ago with backing from its directors, private investors, the Oxford Trust and the National Endowment for Science, Technology and the Arts, has arranged a £230,000 equity refinancing. This will allow it to embark on case studies to prove its products work and take it closer toward commercialisation.
Sampson anticipates breaking into an international market with £1 billion-plus potential. Parafricta, which had previously raised £200,000, is receiving half the new money from a group of 20 investors assembled by Oxford Investment Opportunity Network (OION) – an organisation for business angels.
HBOS-owned Bank of Scotland Growth Capital (now to be acquired by Lloyds
TSB) is providing the other half under a co-investment programme agreed with
OION in January. Under this programme, the bank matches funds committed by OION’s members on the same investment terms.
Typically, the bank will commit between £25,000 and £250,000 to any one investment. It recently matched a £250,000 investment by another angel group, Thames Valley Investment Network, into Green Energy Options. This company has developed monitoring devices of energy consumption and the £500,000 provided is part of a £678,000 funding.
Green Energy Options CEO Patrick Caiger-Smith says the company will use the new funds to ‘secure the remaining links in the chain as we step up production. We will also continue to secure channels to market, particularly via energy suppliers and housing developers.’
Rabbit from the hat
Debt refinancing is an altogether trickier proposition. Timing is crucial and so is staying friendly with your bank and keeping it well informed, argues Nigel Dale, banking partner at law firm Eversheds. Last year the firm helped arrange the replacement of camping holiday and educational company Holidaybreak’s £255 million debt facility. The company had made two acquisitions and needed to refinance its debt by December in order to conduct more buy-outs.
‘The board had the foresight to realise early on there was a liquidity problem coming and took the decision a year earlier,’ explains Dale, noting that Holidaybreak’s finance director kept on good terms with his banker. ‘We got the refinancing away in May.’
In the event, the company replaced its previous deal with a £275 million five-year facility via a six-bank syndicate led by Barclays and Royal Bank of Scotland. Carl Michel, Holidaybreak’s chief executive officer, says the refinancing package will provide ‘flexibility’ and allow the company ‘to consider further acquisitions if and when appropriate’.
Dale also cites retailer Next’s recent £295 million refinancing. ‘They could have waited until 2009, but decided to go early and got a sensible price’. He maintains that the world has changed: ‘We are back to true relationship banking and the people who used to beat up their banks for cheaper deals don’t get anywhere now.’
Casualties of war
The downturn has had a more dire effect on upmarket estate agency group Humberts, which had grown fast by generously priced acquisitions involving deferred payments. James Money, director of restructuring and recovery at accountancy and finance group Smith & Williamson, was called in when the slump in property transactions began to bite.
By April, Humberts had prepared a refinancing plan which would turn the deferred payments into bonds and raise cash by selling off some subsidiaries. At the last minute, the buyers of these subsidiaries cut their offer price so drastically the deal
fell through and Humberts was headed for administration.
Before that happened, Smith & Williamson moved to sell as much as possible of the business and save its name with the public, with the help of Humberts chairman John McLean. A buyer for most of the business was found in the form of entrepreneur Salah Mussa, who heads the Mercantile Group.
The operating company Humberts Ltd went into administration, owing heavy sums to the parent company, which did not, but instead became a cash shell, Pedstowe. The bits bought by Mercantile trade under the Humberts name, but as a totally transformed concern.
Eye for detail
If the numbers don’t add up, deals won’t go through. Private equity group CIT Commercial Finance Europe’s backing of a £38 million refinancing of derivatives trading software concern Rolfe & Nolan shows how business is being done.
Graham Randell, CIT’s senior managing director, comments: ‘We underwrote the whole deal and then sold off the mezzanine debt element. We recapitalised it and it has outperformed its business plan by 20 to 25 per cent.’ A year later ION Trading bought the company and a satisfactory exit was had by all.
Randell acknowledges that things have changed. Previously, ‘you could do anything, but over a year ago, when the market turned, you had a sharp stop to recaps’.
Since then, he says private equity houses and others have been switching their attention away from the mega deals towards the mid-caps. Backers are wary about earnings projections and large companies often suffer from debt of six or seven times
historic earnings, precisely at a time when their earnings are likely to flatten or fall.
So CIT is looking at refinancing among smaller concerns, such as one outperforming entity in the healthcare sector making acquisitions, where the debt providers will put up all the capital. As long as the quality is right, ‘the pricing is higher and the fees
Refinancing takes longer now, says Randell. ‘Eighteen months ago, we saw deals four to six weeks from completion in automatic packages from sponsors, but now it takes four to five months to close a deal.
‘Aspirations have changed. A bigger equity cheque is needed and vendors are leaving money on the table to fill the gap between the price they want and the price they can get.’
One perhaps welcome consequence, he adds, is that ‘we are involved in the due diligence. It’s more of a partnership than before.’