26 corporate finance


Finance terms that you can bank on


Credit markets may still be depressed when compared to their 2007 highs, but banks are lending where the fundamentals are in place, write Patrick Long, partner (right) and Jim Meechan, banking consultant (below) of Pitmans


In February of this year, Project Merlin was proudly unveiled by chancellor George Osborne as a way to ensure the UK’s four biggest banks (plus Santander) would lend more during 2011 than they did during 2010. With companies across the land claiming that credit was impeding their business activities, the agreement looked like a positive move for the UK economy.


But less trumpeted has been the inherent conflict between Project Merlin and the Basle III global banking standards. Designed to improve the resilience of the international banking sector, the standards set new rules about how much capital banks have to keep in reserve as a cushion against defaults. Essentially, it reduces the amount a bank can lend relative to the level of capital it holds; however desirable this may be, it is hard to reconcile with the aims of Project Merlin.


With the Basle III standards set to be fully implemented in 2012, banks will spend 2011 gearing up for their adoption. This would suggest that lending will continue to be restricted over coming months. Banks are still lending, but you need to be in the right sector.


From a property perspective– the sector responsible for the majority of bank losses, and therefore a good indicator or how lending is returning – a future income stream is vital. As such, healthcare, nursing home and education projects are proving to be attractive to banks for financing.


But away from such markets, creative solutions need to be found. A classic ‘catch 22’ would be where a bank won’t finance the construction of a building until a pre-let agreement with an occupier is in place, while a potential occupier does not feel able to commit until the building is at least partly constructed.


In such a situation, alternative bridging financing needs to be found; venture capital or similar opportunity funds can be approached for investment, getting the project up-and-running before a bank provides the remaining necessary finance. Again, it is the commercial edge (ie: the promise of future cashflow through rent) that provokes interest from banks and other investors.


But with lenders returning to the market, could the current situation evolve so that, once again, competition between banks drives down lending costs? In the short-to- medium term, this seems unlikely. Interest


www.businessmag.co.uk


rates cannot remain at such benign levels forever, and with pressure to increase capital reserves, banks will need to keep margins relatively high.


Looking specifically at property transactions, leverage is set to fall further before it starts rising again. In addition, the ongoing focus on cashflow rather than loan-to-value ratios will see loans become more like their non-property equivalents. LTV ratios are a blunt instrument when used as a lending covenant, and cashflow – ie the ability to meet the repayments – is a much more stable indicator. Whether bankers will be able to resist the apparent safety of LTV ratios as the recovery continues remains to be seen.


What has become clear is that bank finance is only available for firms and projects that represent a suitably low risk to the lenders. But it is also apparent that different banks have differing appetites for specific kinds of lending; the trick is to know which banks are in each market. It is something that Pitmans’ banking and finance team has a proven track record in.


Watertight agreements


But where finance has been verbally agreed with a bank, an asset-based lender or other financier, there remains a curious tendency of borrowers to take their foot off the gas when it comes to negotiating formal finance agreements and security. Despite hard upfront negotiation of the commercial headline terms to secure the best deal possible, the documentation often fails


THE BUSINESS MAGAZINE – THAMES VALLEY – JUNE 2011


to reflect the deal specific terms that the borrower thought had been agreed.


This lack of due diligence with the paperwork – and it is a function of the power that lenders hold within these negotiations – can lead to too much latitude being given to the lender. Small differences in a loan agreement or a security document may seem minor at the time of signing, especially if the finance is time-critical, but should a specific situation arise then the borrower could be left exposed where previously it considered itself to be safe.


There is precious little comfort for a borrower finding out too late that its assets might be seized due to a seemingly minor infringement of the loan terms. Only effective and timely due diligence and sensible negotiation of the transaction documents before signing them can guarantee protection from such happenings.


You may have to pay for expert legal advice to ensure the documents reflect the deal but when making such an investment can a borrower realistically afford not to?


Details: Patrick Long plong@pitmans.com 0118 -9570488


Jim Meechan jmeechan@pitmans.com 0118-9570220


www.pitmans.com/banking-finance


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44