The Debt Connection – November 2013

Dato

In the third Debt Advisory newsletter from Clearwater Corporate Finance, we look at debt funds and how they can support businesses.

Bank support for small to medium sized businesses has been somewhat limited over recent years compared with pre-crisis times. Banks remain cautious, focusing on stronger borrowers with defensive characteristics, stable cash flows and strong track records, primarily as a result of increased regulation and higher capital funding costs. There has also been the retrenchment from the UK of overseas banks, reducing competition. This has created an opportunity for alternative funders, including debt funds, to enter the market.

There are an increasing number of debt or credit funds in the UK, some who have recently raised funds and others who have been in the UK market for a number of years. These funds have been invested in by insurance companies and other entities with surplus cash. A high level of liquidity in the US market has pushed down pricing, with fund managers looking to the UK and Europe as a means to secure better returns.

There can be a number of advantages to using a fund over traditional bank lending. Typically, there is a greater degree of flexibility available in the facility structuring which can be tailored to suit business strategy. One element involves longer term funding, where commitments of between 5 and 7 years are commonplace compared to the typical 3 to 5 year commitments normally provided by traditional banks, and back-ended repayment profiles in the form of balloons and bullets. This allows a business to potentially reallocate cash previously designated for capital reductions to capital expenditure or other growth strategies, such as a roll-out programme.

Other elements of flexibility include relatively covenant-lite facilities compared to traditional bank terms and often a higher leverage multiple (overall amount of debt) against earnings than may be obtainable from a bank. Without the capital constraints experienced by the banks, debt funds are also able to write larger, single loan facilities, with single holds of up to £80m or £90m achievable. A facility of this size would probably require a club of 3-4 traditional banks.

The trade-off for all this flexibility though is the pricing, which usually is 3% to 4% higher than you would see from a bank. Also, once the facility is drawn, it can be more difficult to amend or renegotiate terms. Historically there was a view that the relationship between borrower and funder could also be more arms length, although we now see increased professionalism, with investors more willing to actively participate with their clients.

For small or mid-market businesses, these funds can provide a viable alternative to banks that offer greater flexibility and longer term surety of funding, but for a higher price. We expect to see their presence increase within the UK going forward as banks undertake less direct lending and move towards being funding co-ordinators and managers.

Deals News

Kindertons

Clearwater Corporate Finance led and arranged funding for UK private equity firm Sovereign Capital to acquire accident management services provider Kindertons, with the bespoke funding provided by Chenavari Investment Managers.

Kindertons is a nationwide specialist provider of outsourced accident management services for motor insurers and insurance brokers together with claims management services for drivers who have been involved in a road traffic accident. Sovereign will work with the management team to grow the business both organically and through carefully selected acquisitions to meet the increasing demand for its offering.

If you would like to discuss any of the subjects covered in more detail, then please get in touch with us using the links below.

Chris Smith – Partner

Mark Taylor – Partner

David Burton – Manager