Raising Finance in a Challenging Environment

Newsletter Q1 2010

Raising Finance in a Challenging Environment
Financing Alternatives - Bank Finance
Equity & Bond Markets
Venture Capital & Private Equity
Bridging the GAP
Activities of DC Dwek Corporate Finance
Conclusion


Raising Finance in a Challenging Environment

2009 was challenging for businesses due to the combined effects of the slowdown in economic growth and the reluctance of banking organisations to extend debt finance. There has been however a general improvement in the market sentiment and confidence, particularly in the second half of the year. Equity markets have recovered from the second quarter and there is availability of funding typically for large and medium sized corporations. Rights issues in large size have been underwritten and successfully completed including the £13.5 billion issue for the Lloyds Banking Group and the $19.3 billion issue for Bank of America. Similarly, there have been large amounts of debt issuance in the bond markets as Governments and large corporate organisations refinance their obligations. While it remains a challenging environment for growth businesses, especially for the small to medium sized companies, nevertheless companies can obtain financing as long as they are flexible and creative. top

Financing Alternatives

Bank Finance

The reasons for the credit crunch have been well documented. For businesses, the main effect has been the difficulty of rolling over existing short and long term debt and in obtaining new facilities. Financing is available, but often at more onerous rates and on stricter terms, including the provision of extra security and/or a higher proportion of equity. The key points in dealing with banks in the current environment are as follows:

  1. Commence negotiations early as the approval process is taking significantly longer to complete;
  2. Ensure compliance with all current loan documentation, information and covenant requirements;
  3. Broaden banking relationships, both domestically and if appropriate internationally; and
  4. Improve chances of successful financing by considering other options. These include financing based on assets, invoice discounting for working capital facilities, the provision of enhanced loan security and/or additional equity.

As banks continue to improve their capital structure, further credit will be available in 2010. top

Equity & Bond Markets

The stock and bond markets have been available for large and medium sized companies. Rights issues and secondary equity offerings have been completed in large size, but often at substantial discounts of 30-40% to the underlying share price. Whilst this has caused significant dilution for existing shareholders, it has allowed companies to reduce the amount of debt on the balance sheet and to improve their capital structure. As the markets have improved, the number of share offerings from medium sized companies and the number of Initial Public Offerings by businesses with strong prospects and management teams have increased.

Similarly, the bond markets have provided large amounts of debt for public companies allowing refinancing often at lower interest rates. 2010 will provide opportunities for smaller growth companies with a solid track record to access equity markets. With a continuing low interest rate environment and increased market confidence, investors will target Initial Public Offerings in order to enhance their returns. The following are the key points for a company considering an IPO:

  1. Solid Track Record. The Company needs to demonstrate that it has made both financial and operational capability for a public company.
  2. Sufficient Management Depth. Running a public company from the regulatory perspective and reporting to the investors requires an experienced management team to execute the business plan. Companies also need to strengthen their board of directors to ensure the necessary support and governance.
  3. Business Plan. The goal of investors is to realise a growth in shareholder value through capital gains and dividends. The relative performance of a company within its sector will be closely followed. A clearly executed plan based on either organic and/or acquisition growth will be monitored by investors.
  4. Managing Investors. Consistent investor relations are crucial in order to maintain interest in a company following a flotation and to manage expectations. top

Venture Capital & Private Equity

From the second half of 2009, there has been an improvement in the availability of equity funding from both venture capital and from private equity. However, the focus has been on supporting and restructuring existing investments rather than committing to new transactions, particularly if bank or debt financing is required. The restructuring of private equity backed companies has often been successful in 2009. With banks keen to avoid write downs of loan positions, it has been possible to restructure debt facilities, particularly if the financial covenants and ratio requirements on the original debt are not too onerous. However, the financing margins and associated costs have increased significantly even though the market interest rates have remained at historic low levels.

Large technology companies including Cisco and HP have been purchasing smaller technology businesses in the last few months as valuation expectations have become more aligned. Furthermore, with increased confidence in the capital markets, there are plans for a number of public equity offerings of privately backed companies in 2010 as well as new buyouts since debt funding is becoming more available. Successful exits in 2010 will allow for further fund raising by the venture capital and private equity funds, providing increased opportunities for growth companies to access equity funding.top

Bridging the GAP

In spite of the improving sentiment, there remain many situations where bank or equity/debt funding from the capital markets or from private equity/venture capital is not available. In such situations creative financing solutions need to be considered. These include:

  1. Joint Ventures. A joint venture with a client or a competitor is an alternative to an M&A transaction where financing may be an obstacle. This can provide opportunities to access new markets or sectors particularly internationally and where both parties add value to the venture. However, joint ventures can be difficult to manage and it is therefore imperative that clear responsibilities and the sharing of risk and return are agreed at the outset to avoid paralysis in decision making and potential poor performance. Whilst successful, JVs can continue operating for many years. There are cases where one party will purchase the shares of its partner at the appropriate time.
  2. Supplier Financing. With working capital constraints and limited bank funding, businesses may have to resort to a variety of methods to ensure business continuity. A supplier will be keen to ensure that his products can continue to be sold. Therefore the availability of extended credit lines, medium to long term loans and even equity injections have been provided recently by suppliers. Commencing early discussions is important and the company may benefit from the financing terms and the speed of response.
  3. Client financing. Similarly, a number of businesses have resorted to asking their clients for funding. With knowledge of the product and of the business, a client or a syndicate of clients can provide a more rapid bridging solution for short to medium term funding.
  4. Club Deals. For M&A transactions or for the purchase of assets, several equity investors can join together with the view of concluding a transaction and refinancing at a later stage when debt or private/public equity is available. This has been a common practice in the property market during 2009.top

Activities of DC Dwek Corporate Finance

DC Dwek Corporate Finance prides itself in developing creative financing and transaction solutions for its clients and partners. During 2009, this has included successful financing, joint ventures and execution of complex Government contracts in the international mobile water desalination sector. This has provided hands-on experience of financing and growing an international business through a joint venture in a challenging market. Similarly, our advice to private and publicly listed clients on balance sheet restructuring has provided assistance with commercially appropriate solutions. Whether it is building businesses internally, via acquisitions, joint ventures, raising finance through banks or in the public markets, DC Dwek Corporate Finance has the international experience to assist clients.

Conclusiontop

2009 has been a challenging financing environment. Whilst 2010 is expected to improve, there may be periods of volatility. Turbulent and decisive financial markets require creative corporate finance solutions and rapid execution when exciting opportunities arise.

The views expressed in this newsletter are for information purposes and are intended for eligible counterparties and professional clients only.
DC Dwek Corporate Finance Limited is authorised and regulated by the Financial Services Authority.