Debt Advisory: A Market of Two Halves
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Mark Taylor, Debt Advisory Partner, Clearwater Corporate Finance
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2012 was characterised as a market of two halves in terms of pricing and availability of capital, with little to suggest it will materially change during 2013. Large investment grade borrowers were able to access funding in the debt capital markets, with bond issuance outstripping syndicated bank loans in 2012. Strong appetite from investors came from the need to increase returns above the historic lows seen from government bonds. However, borrowers should remember debt capital markets are volatile. Any refinancing must be planned with plenty of time ahead of any maturity to retain flexibility and to ensure lines are in place upon maturity. Debt capital markets are largely irrelevant for mid-market corporates, but there are other funding options which have been utilised in addition to the traditional bank market. These alternative markets included private placements, retail bonds and asset-based lending solutions. Asset-based lending often provides a more flexible funding structure for borrowers, with competitive pricing available. In the current unpredictable environment, maximising options is important to reduce the risk of surprises and ensure decisions are based on a range of options. The Funding for Lending Scheme to date has shown evidence of reducing pricing for some businesses, however, the Bank of England figures show net lending actually fell in the final quarter of 2012 by £2.4bn. In the Bank of England’s latest Quarterly Bulletin (14 March 2013), the central bank said heavy use of leverage in buyouts put companies at risk of defaulting and the refinancing burden could undermine the banking sector through losses. “The low level of exits, combined with a weak macroeconomic backdrop, suggests that many private equity-owned companies may not currently be able to repay their leveraged loans and will therefore have to refinance. Failure to meet this refinancing challenge might result in default and therefore implies risks for bank exposures to private equity-owned companies.” Some borrowers may find there aren’t alternatives to the bank market due to poor trading or sector issues. However, some complications can be lessened with careful positioning of the credit story and structural actions to maximise deliverability to a credit team. With uncertain bank liquidity and appetite, having a “Plan B” is good practice. 2013 Continued issuance in 2012 supported development of the relatively new retail bond market, with credibility rising. Initially the market was considered to be restricted to borrowers with a recognised brand, material assets or strong performance. Whilst brand awareness is still important, there has been an increase in the range of borrowers accessing funding. Also, the range of terms and structures has increased, with issuance from rated and unrated borrowers, covenanted and uncovenanted bonds, with fixed and index-linked coupons. More than £2.6bn has been raised since the retail bond market opened, with a number of successful repeat issues. The market performed particularly well in the second half of 2012, with nearly all issuances closing at or above the targeted amount. We expect growth to continue in 2013, as the market’s credibility rises. Clearwater is an award winning mid-market corporate finance advisory firm with a market leading research and origination capacity. Our debt advisory team is made up of experienced corporate bankers with a wealth of knowledge of the debt and capital markets.
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