FINANCE
Diversity in debt solutions
By Gregory Moreton (left), Partner, Head of Debt Advisory and Mike Gahir (right), Director, Debt Advisory at Chamber strategic partner RSM
Debt is on the increase across the mid-market in the UK as companies regain confidence following the financial crisis and are looking to finance their operations in a way that gives them a more efficient cost of funds. One important reason mid-
market companies are willing and able to take on more debt to meet financing needs is that there is a greater variety of debt products to fund growth and development as well as corporate activity such as acquisitions, buyouts and recapitalisations. On top of the classic bank market
familiar to all, there are now two different types of lender; the Asset Based Lender (ABL) and the Debt Fund; both are broadly US concepts and have been part of the US mid- market scene for some time. All this choice can leave
companies wondering where is best to go and it is no coincidence the increase in debt options available has seen a rise in the use of debt advisers in the same period. Borrowers are increasingly seeking the convenience of a knowledgeable link into the market and the reassurance they are being presented to lenders in the best possible way.
Planning finance raising and choosing between the options 1. Borrowers should plan ahead and spend time deciding which market(s) to approach
2. They should make a clear “ask” of the lending market(s) they approach
3.Where there is a large trade debtor book, they should look at whether using ABL provides a cost-effective form of finance
DEBT OPTIONS Asset Based Lenders (ABL) ABL providers offer businesses “receivables-led” financing, where the focus is on raising money against trade debtors. This can mean businesses can access higher levels of potentially cheaper borrowing by giving lenders closer control and monitoring rights over their invoices rather than under conventional banking arrangements.
Debt funds Debt funds are lenders whose money comes from underlying investors such as pension funds, rather than a bank balance sheet. Their return expectations are typically higher than banks’ and it is the uptick in overall borrowing
costs following the credit crunch that allowed them to become viable lenders in the UK. What borrowers get for their
money is a product that looks a bit more like a bond in that it’s typically “interest-only” and can often achieve higher leverage than bank debt.
Good old (and challenger) banks The bank market has responded to new challenges by upping its own game. Most mainstream banks also offer ABL lending and many have amended their loan offering to compete with debt funds. The market has also seen the emergence of new “challenger” banks and the reinvigoration of existing challenger names.
• This can be topped up with other assets, such as stock, equipment and property, if required
4.Where cash flows are strong and will support lending, borrowers should consider the two cash flow routes alongside each other
• debt funds for higher leverage and more flexibility at a higher price
• banks for lower priced, conventionally structured facilities
5. If a borrower has characteristics that support ABL and cash flow lending, it may make sense to approach both markets at once, so that the offers can be compared
There are a growing number of opportunities for mid-market companies, but it is recommended to seek advice beforehand.
Advice following minimum wage increase
Government’s announcement of a 6.2% rise in the National Living Wage (NLW) from 1 April, which applies to millions of workers aged 25 and over, marks the largest cash increase in the legal minimum wage; rising from £8.21 to £8.72 per hour. Government has confirmed the new rate will result in an increase of £930 per person annually for the 2.8 million full- time workers who earn NLW. Workers aged under 25 earning
NMW will also see an increase of between 4.6% and 6.5%, depending on age; the biggest jump since its introduction two decades ago. Annalise Lovett, Partner at
Newby Castleman, said: “Benefits of an increase in wages range from
improved happiness and satisfaction levels among employees to better staff retention and even an increase in business profits due to increased productivity from the workforce. “Of course, April’s increase will
lead many employers to re-evaluate their overheads, which could be achieved by cutting back on non- essential expenses. Nevertheless, the benefits to all concerned of this NLW increase should not be underestimated. “Any employers unsure of how to
manage the upcoming changes should seek professional advice as soon as possible to ensure they are practically and financially prepared.”
business network March 2020 93
The rise in NLW will be in effect from 1 April
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