Act now or face ‘refinancing wall’, expert warns

MANY businesses with debt facilities are facing a “refinancing wall” and must immediately begin to examine the makeup of their funding requirements in order to plan for growth, according to a leading corporate finance expert.

Roger Esler, corporate finance and debt advisory partner at accountancy firm Deloitte in Leeds, said the recent challenges faced by businesses to rally against market downturns and the consequent impact on their ability to manage debt were being compounded by a major debt refinancing pipeline looming between 2011 and 2013.

Mr Esler told TheBusinessDesk.com: “There will be an unhappy collision regarding maturity dates since both the cheap loans arranged in private equity deals in 2005, 2006 and 2007 and the corporate loans renegotiated during the recession on three year terms reach maturity.

“In short, the winners – those with access to growth capital – and losers – those constrained by emergency measures or ‘unattractive’ balance sheets – may look similar now, but in two years’ time their fortunes will be poles apart.”

Mr Esler believes companies which do not begin to plan to regnetotiate their debt positions as soon as possible will not be able to plan for growth going forward.

Some businesses have had to turn to shareholders for emergency rights issues or equity injections. Others have divested non-core businesses or assets to reduce their debt levels.

A number have had to convert debt to equity with existing shareholders seeing their positions significantly diluted as a consequence with their banks taking a controlling position.

“Good quality corporates have gone back to the banks early,” Mr Esler said. “For the lesser quality corporates they’re going to find more of a problem and between now and nearer the time they have to have thought through their business plans thoroughly.

“We’re still going to see some businesses cost of debt going up significantly. The banks will be devoting most of their energy to the better quality credits.”

Mr Esler said there were practical ways to assist a business wishing to start the process of recovery and equip it for future growth and the ability to compete effectively.

“They start with a fundamental re-evaluation of competitive position and business strategy in the ‘new world’,” he said. “Then comes the job of aligning this with the right balance sheet to deliver the strategy – ensuring both appropriate debt terms and an investment case that will support a new equity requirement. 

“Anticipating the need to address maturing debt facilities well in advance will be a key part of this as the queues at the doors of the banks in the next couple of years will be long.”

Some businesses will achieve all of this within their existing ownership structure, while others will need to consider more fundamental forms of refinancing, he said.

“Absent such an approach, we will see dramatic differences in performance within individual sectors that are a consequence of balance sheet constraint rather than underlying business quality,” he added.

Mr Esler believes companies that wish to pursue growth strategies over the next few years have a great opportunity to do so.

But he added: “However, the balance sheets and nature of ownership of businesses will make the difference like never before between their ability to survive or to thrive relative to their competitors.

“Appetite for high levels of debt – whether from banks, businesses or shareholders – is some way off returning. For some businesses, the measures required to reduce borrowings look set to continue to take priority over growth until equilibrium is reached. For those that have already achieved equilibrium, increasing debt so soon may not be an option.

“Some will have strong balance sheets or have supportive shareholders ready and financially able to back management plans. But some will not.”