With the news that the finnCap Debt Advisory Team has advised Iofina Plc, who have signed new debt facilities of $18m with First Financial Bank, a Cincinnati-headquartered US regional bank, our latest podcast hears from Debt Advisory Partner at finnCap Group, Graham Cooke. Graham shares his views on the debt landscape of 2020 and how lenders are poised for the future.
Listen here and read the transcript below
Jonathan Bright, Digital Content Marketing Manager, finnCap Group – 00:04
Hello, and welcome to the finnCap podcast. Today we're in conversation with Graham Cooke from the Debt Advisory Team here at finnCap Group.
Graham Cooke, Partner, Debt Advisory, finnCap Group – 00:14
Yeah hi Jonathan.
Jonathan – 00:15
Have debt financing deals changed over the past six months compared with the same kind of period a year ago?
Graham – 00:14
Yeah, I think so. I think COVID has been such a unprecedented event and had such a significant impact, then definitely it has. I think if you go back pre-COVID, Jonathan, there was a good balance of M&A activity, growth funding, refinancings, lender appetite was pretty strong across all constituent groups. So banks, alternative lenders, credit funds, and I think despite Brexit uncertainty, I'd say it was operating as normal a market as it had for a long time if you go back to 2008.
I think if you sort of pick it up in March and then look at the last six months, then clearly businesses have been impacted significantly. And they've been very much focusing on the short term on their cash, preserving that cash and making sure they don't burn through that cash. And, you know, let's be clear, some of them really just trying to survive, businesses and business owners are being taken all the time they have available to understand the impact and where there's been support from government regulators, advisors and existing lenders, then they've been taking all the support they can get. But I think for us with the transactions we've been working on through the past six months, then really the key thing is there's it just taken longer to progress and complete. I guess that's for obvious reasons, because this COVID impact has been on all parties, clients, and lenders through this period, and some of those lenders have struggled at times, but you know, we'll see how evolves through the rest of the year.
Jonathan – 02:03
We are where we are, given the events of the first half of 2020. How do you see the debt market overall evolving through the rest of the year?
Graham – 02:12
Yeah, that's an interesting one. I think if you go back to pre-March, and obviously the COVID impact, then before that, despite Brexit unter certainty, as I sort of mentioned before, generally all lenders were positive towards new lending opportunities. I think that was an evolution, a natural evolution since 2008, as new entrants to the market came in - alternative lenders and credit funds. And they disrupted the market and had capital from their investors to deploy quickly, with more flexibility. And that's all the banks, you know, need to sort of fight back a bit, I guess. And I know from personal experience, my time in one of the High Street banks, that banks took quite a while to recapitalise their balance sheets strongly recover from ‘08/’09 and sort of build up that relationship again with their client base and maybe sort of make up for mistakes of the past. But I think now with COVID coming through, it's an impact that's still developing, I think, Jonathan. You've got all lenders, whether banks, alternative lenders, or funds, concentrating on their portfolios. They've been very much supporting existing clients, I guess sometimes in emergency situations. And generally trying to understand their exposure to certain sectors, especially the High Street banks, and people we talk to, the lenders on new transactions we're working on, you know, originators, they've been pulled across to help portfolio teams. So I think as you would expect, and as I've sort of hinted already, most lenders are being extremely cautious and selective in the business for the time being, and at times, some lenders have actually told us they've been closed for new business. So, we'll just have to sort of watch this space.
Jonathan – 04:08
And this is very unfortunate to hear that. And I guess a lot of parallels are being drawn between right now and the 2008 crash. And, yeah, I mean, from your experience and your background in High Street banks, do you think 2020 will change the UK debt market in the way that 2008 did?
Graham – 04:29
Yeah I do, I think it will. I think from what we're seeing at the moment, we'll see, I think we'll see a new debt market landscape evolve. And what I mean by that is, I think individual lenders will have more individually specific strategies going forward for their lending. Because I think in the past, there's been more commonality across certain groups. So I guess to generalise, we've seen High Street Banks generally behaving the same, alternative lenders similarly, and credit funds. And what I mean by that in terms of appetite terms and conditions, covenants, they want to see types of sectors they're positive about, not positive about, each of those constituent groups generally operated in a similar fashion. I think what we're seeing now and what's evolving is that certain lenders will probably become or are becoming more or less aggressive on certain transactions with individual sectors. And I think that's been driven by portfolio exposure. They're probably dealing with, you know, early stage impairments on loans they’ve got right now. And one interesting thing which will be interesting to see play out is that some of the alternative lenders and funds will probably, I guess, be experiencing this for the first time because this is the first big crunch since ‘08 when a lot of those tentative lenders and funds came into the market and were set up.
But I think one of the other key points for me now is that it's still difficult for a lender to assess risk and price risk, right now. So, you know, every transaction looked at on a case by case basis with the theme of selective and cautious I think is going to continue. But I think for clients listening to this, we still are seeing sufficient liquidity and demand from the market to complete debt financing transactions right now. And that's really being evidenced in those we're working on have been for last few weeks and those we're starting looking at now. They may take longer to complete than they did in the past. And lenders and clients obviously still need to be comfortable with the deal, the client, and the final terms, but I think as long as you go as an advisor to a wide enough pool of lenders, then you should get still get sufficient liquidity to close the transactions you're looking at. I think on the supply side, then there will be a high volume of refinancings, because, you know, one of the features over the last six months is - and I haven't got the stats on me - but the significantly increased levels of new corporate debt that's gone into corporates, commercial and corporate clients, which will need to be dealt with, refinanced, managed, paid down, over coming years. So I think that's going to increase level of debt and level of activity. As we move away and the economy and the market stabilises a bit. And then obviously, you've got the return also of M&A activity. And I think on M&A activity, what’s pleasing for us is, you know, some of that has started to come back already and we’ve already mandated for some PLC clients and private clients on M&A buy-side opportunities, which really is great to see.
Jonathan – 07:58
And how are you seeing the outlook for clients in the debt market right now?
Graham – 08:02
Well, I think we're coming to the end of a pretty intense six-month period. And I think the client, our clients, businesses out there, that is a period that's been dominated for them by lender support, regulatory tolerance for PLC clients, government schemes and lender focus towards their existing clients. So as I said earlier I think clients that have had operational lenders, house banks, existing lenders, already supporting their businesses have really, that's really helped them. Businesses, I guess, have been, you know, spending the last six months – first of all, as I said earlier, focusing on their staff and their clients and making sure everyone's safe, focusing on cash, reviewing their operating models, and I guess planning for the post-COVID world and how resilient their business model is. And, you know how, how resilient their underlying client base is and their products. So I think this takes a bit of time. And I think businesses will be getting to a point now where hopefully they can accurately model the outlook for their business and get more comfortable, you know, over the next sort of one, two, three years. And then and then I guess they're in a position to plan their balance sheet funding strategy, consider across debt and equity, and possibly look at, you know, M&A and growth. And I'm sure there'll be opportunities that the last six months will throw up for businesses to look to take on other is either significant transactions or sort of bolt-on mergers. So, I think there will be lots of debt for refinancings. And as I said earlier, many have been deferred in a building up or spiking in volumes. But I think if you look at the conversations we're having right now, with the client base, then, pleasingly, more conversations with more clients around debt, 2020, 2021, how they manage that debt, how they would look to take debt on for a transaction. So I really do expect a really busy quarter for 2020 and probably all the way through 2021 and 2022.
Jonathan – 10:29
And just to carry on that point, do you have any big advice for clients regarding debt financing as we as we move forward through 2020?
Graham – 10:36
I think for me, the most important point to a client right now would be give yourself enough time to plan and prepare properly. You know, don't find yourself short of time with a either refinancing, an important refinancing or an M&A opportunity where you haven't got debt lined up and debt needs to be part of that transaction.
And not just time to plan and prepare, but also to consider all the options you have available. So what I mean by that is, amount of debt. And that could be the amount of debt as a proportion of the overall transaction alongside equity, or it could just be the amount of debt that you as a business are happy with on your balance sheet, especially if it's the first time you've taken on debt.
But there will also be other options to consider type of debt facility, term loan, revolving credit facility, asset finance, there's lots of different options and finding the right one takes a bit of time.
And then I think one of the things I've always seen, especially the last year, and before when I was it was in the bank was, one of the important things for clients on any transactional debt financing is finding the right partner for them. So yes, they may have an offer, with some attractive terms and conditions from one lender. But if the feeling there is not right, and there's not a mutual joining together, that can sometimes see clients prefer a different lender. We regularly hear that from clients through a process that what they're trying to find is not just the right terms and conditions, but the right partner for them for the next one, three, five years, to help them help them grow. But I wouldn't have you know, navigating this debt market at the moment on your own right now would be pretty tough. If you run with one lender, you're taking the risk on them delivering. We see lenders that occasionally can get a decline at the end of the process. So you know, it's important to manage that process correctly and appropriately and sometimes that can be quite delicate. Making sure there's the deal at the end of the process.
And then and then there's some of the more sort of traditional reasons that we would be trying to help a client, which is wider market liquidity, competitive tension, and obviously an advisor can help a client and provide the manage that for you. So, a lot of these things are important. And in the current market clients are going to need to be well prepared to present their businesses to lenders, who, as I said before, will be very cautious and selective in their transactions they participate in and where they put their money to play. So, you know, in summary, Jonathan, I really think we're well placed to help clients to do this going forward, and we look forward to helping many more in the future.
Jonathan – 13:43
Indeed, we are and that's a great note to end on. Graham Cooke, from the finnCap Debt Advisory Team, it's been a real pleasure. My name is Jonathan Bright. Thank you for joining us and join us again for the next finnCap Group podcast.