Financing and refinancing strategies

For many, the current banking crisis has had the most profound effect on new entrants coming into the market. A significant reduction in the number of lenders together with increased equity/margins has effectively created a significant barrier to entry.

Whilst this is clearly a major problem, a potentially bigger issue sits on the horizon. What happens to all those five year facilities that are close to reaching maturity?.

The market in 2005 was a very different place to where we find ourselves today. Plentiful debt, banks taking classic mezzanine positions without charging the appropriate risk premium, falling margins, and a general acquiescence by banks to the borrowers structuring and security requirements.

Whilst there is undeniably a more limited selection of lenders, debt can be obtained albeit on terms that reflect the changing landscape in which we find ourselves in today.

The root of the problem is that in the 'new world' why would any lender wish to compete for low return, high risk debt tranches before we even consider factoring in the substantial falls in asset values over the past 12 months?.

For the lucky few, where existing leverage levels remain modest, or where the asset class remains en vogue, deals are being done. Yes the margins have increased, though a reduction in base rates has provided borrowers with some comfort, cushioning them from any significant impact caused by the lender re-pricing his risk.

For the majority however, the future is less certain. As facilities near expiry, the borrower now faces the dilemma of how to deal with these issues. For the bank, they simply can not expect to issue a formal demand for payment of the loan as the borrower will not be able to do this.

In fact in many situations, the borrowers' equity has largely evaporated and the assets may be under water. A forced sale at this stage of the cycle would almost create an outcome too horrible to contemplate.

Faced with these challenges, many banks are providing facility extensions though using the changed market conditions as the catalyst to substantially alter the terms of the facility improve their risk premium.

This is a common sense approach by the banks to change the balance of power on the facility agreement. However banks must show caution to still leave some upside for the borrower or run the risk of them handing back the keys. Therefore adopting a full cash sweep is not the right answer.

Banks must keep the borrower committed to the transaction, as this must give them their best chance to preserve value.

The one consistent message coming from the banks is that communication is essential. Sitting in wait for the inevitable is no strategy and will place you to the back of the queue for both service and goodwill. Working with a bank, engaging with ideas on restructuring the refinance is the best and only way forward.

For more information please contact:
Jason.briggs@bdo.co.uk