As easy credit gives way to a more cautious banking environment, there is a growing need for debt advisors who can help businesses to secure funding, says Jon Hustler.
The boom times for mergers and acquisitions were fuelled by cheap and free-flowing debt funding.
Those who were buying a business wanted to maximise the amount of funding for the deal and ensure the best possible package. From the vendor’s point of view, ensuring the purchaser had access to a plentiful source of finance was useful in helping maximise the value they would receive.
The debt advisory market grew up during these times. The debt advisor’s role was to source the best, typically the biggest, debt packages – not overly challenging when there were any number of accommodating banks with big balance sheets to choose from. However debt advisors offered a service that allowed the investors and finance director to concentrate on other aspects of the deal.
Now that debt markets have gone into reverse, the need for debt advice continues to grow but today the focus is more about finding sufficient debt funding to make deals happen, and on ‘knitting deals together’ by finding additional investors where a syndicate is incomplete.
In addition, more creative solutions are needed where a company is in distress. An increasing number of companies will require specialist advice in the near future – and not necessarily because the underlying business is at fault. Many over-leveraged deals are coming home to roost. Even very successful businesses may find their bankers are becoming twitchy and may have to look around for new backers or re-visit and restructure their existing debt package.
As the UK economy slows down there is the potential for businesses and therefore their banks to get into a lot more trouble. The state of the property market and fears over consumer debt are only just starting to feed through into the economy. More difficult trading conditions coupled with the overly high debt multiples secured at the top of the market will unfortunately mean a lot of businesses will soon be in need of debt restructuring.
With banking markets as volatile as they are now, even sophisticated corporates with a seasoned finance director find it is difficult to stay on top of the market. Knowing who is lending and who isn’t and at what price requires a specialist who is in the market on a daily basis.
Lower down the scale, small and medium-sized businesses have to look outside for specialist debt advice, whether they are seeking to renegotiate or replace an existing source of funding or finance a new acquisition or other project.
So what type of businesses need the help of a debt advisor? For those at an early stage of distress, a debt advisor could act as a mediator between the investor, management and bank. The business could be breaching its banking covenants or unable to make repayments in which case the company may need a quick solution.
That solution could also include selling parts of the business to realise cash to pay off part of the debt. A sensible, impartial voice within this tense environment should facilitate restructuring to give fundamentally sound businesses adequate breathing space.
For private equity investors, managers or companies considering an acquisition, a debt advisor may be best placed to secure the funding they need.
Meanwhile entrepreneurs contemplating a sale may be reluctant to do so in today’s slower market, and are holding off in the belief that a recovery in value is just around the corner. An alternative may be to realise part of their investment in the meantime, funded by new debt. Again, a debt advisor would be able to go out and source that debt.
While the debt advisory market cut its teeth during the M&A boom years, it may be that in the current market downturn it is finally coming of age.
Jon Hustler is a partner at Clearwater Corporate Finance in Birmingham.