United Kingdom
Raising Finance - Act now - Alex White
As the UK emerges from recession and as owners start to consider the certain new high tax environment, now is an excellent time to evaluate a company's and shareholders need to raise new finance.
In the mid market (businesses valued up to £250m) the private equity and debt markets are well and truly open again and the capital markets have also begun to stir. That said it is a different world out there and companies need to be better prepared and act early to access funding. Its still quite difficult in the larger mid market because clearing banks remain nervous about holding large exposures in individual companies and organising a club of banks for debt lends above say £100m becomes a major practical challenge. Curiously the very large market is more open in cases where debt and equity issues require investment bank rather than clearing bank support.
Our mid market banking and private equity contacts are all knocking our doors down seeking new opportunities to lend or invest. The issue for private equity is that they have to invest and need companies that they can sell on in 3, 4 or 5 years. Not investing creates a problem. Most banks all have lending targets that they have little chance of meeting. Lending criteria is of course stricter than it was in 2007 but that is not necessarily a bad thing and sensible lending deals are available again.
In the mid market therefore the availability of capital is outstripping demand from companies and their owners. This means that the equity deals available are better than many owners may think. This combined with certain tax increases in 2010 means that now is an excellent time to discuss companies financing needs. Common needs for new finance will include:
- Funding a management buyout, family succession or other shareholder reorganisation
- Funding partial share sales / or special dividend pre April 2010 to lock in lower taxation. This could save £millions in personal tax
- Raising finance to help accelerate organic growth and / or acquisitions
- Repaying or refinancing debt to strengthen the balance sheet / ensure going concern
It is not just the strongest companies that are attracting equity funding. As we come out of recession the financial covenant tests of geared companies will become more difficult to meet. They are measured against the last twelve months profits and so covenant headroom will generally get worse next year and not better. Combine that with the potential for businesses to grow and tie up more cash in working capital or capital investment and perversely the risk of debt default increases significantly. An equity cure can sometimes save a good company constrained by a debt structure and with a stronger balance sheet it will be better positioned for growth. It also creates an opportunity to refinance or restructure the existing debt to a more suitable structure and release senior management time away from micromanaging cashflow and bank relations to more productive tasks.
Higher taxes and new growth opportunities all mean companies should look at their financing needs closely. In 12 months time more companies will be seeking new finance and the supply / demand imbalance will have changed. This may mean that financing terms and valuations are no better than they are now. But taxes will be higher and possibly base rates will be starting to rise again. Now is a good time to take action and the markets will be receptive.
If you would like more information on this subject, please contact Alex White, Corporate Finance Partner, at BDO.