Breaking through the Refinancing Wall
WHAT is the ‘refinancing wall’ and why has it become such a big financial issue for business? In the first of a series of articles The BusinessDesk.com, in association with business advisors and accountants Grant Thornton and asset based lender Crédit Agricole Commercial Finance, investigates.
“COMBINED with an economic backdrop that continues to be uncertain the financing of companies remains one of the most important challenges facing businesses today.”
That’s the view of Ian Marwood, corporate finance partner at Grant Thornton in Leeds, and is an opinion backed up by Ian Flaxman, strategic director at Crédit Agricole Commercial Finance, who says: “Quite clearly the turmoil that has rocked the financial world has caused banks to carefully review their risk approach and implications for capital requirements.”
Yorkshire businesses with debt facilities are facing a ‘refinancing wall’ and are being advised to immediately examine the make-up of their funding requirements in order to plan for growth.
The ‘refinancing wall’ refers to a Europe wide spike in re-financings looming in 2011 and 2012 and coincides with tightening of regulations on capital and liquidity in the banking environment, exacerbated by the economic climate felt both in the UK and across the globe.
The issue is leading to businesses facing serious uncertainty and, in some cases, insolvency proceedings, and Mr Marwood says companies in Yorkshire ignore the issue at their peril.
“Banks typically structure term facilities over five years, and the high level of both M&A and private equity transactions in the period from 2005 to 2007 has given rise to the refinancing spike,” he says.
“In the intervening period many companies have faced severe reductions in both profits and cash flow. They may have failed to meet scheduled reductions in overall debt levels and therefore face extremely challenging negotiations with their banks.”
The leverage levels that banks are comfortable with have also been reduced, which has caused further refinancing issues.
Mr Marwood (pictured left) adds: “There has been a significant shift in corporate sentiment which may increase the financing required. In a survey carried out by Grant Thornton earlier this year, over half the respondents said that thus far their strategy had been underpinned by cost reduction, this is now changing strategies for growth.”
The ‘refinancing wall’ is the result of a simple economic scenario based around supply of money and the demand for it, according to Mr Flaxman.
He says that as existing funding lines come under review, lenders will be looking closely to determine two things: whether the funding structure in question is acceptable in the current climate and if it needs to be reduced or added to.
They will also examine what the pricing on the facility should be now, taking into account increased cost of liquidity.
“Whereas before the crisis, the availability of liquidity drove a desire to accept higher risk in order to compete with other funders, we now appear to be back in a more appropriate environment where risk assessment is thorough and considered,” added Mr Flaxman (pictured right).
“Inevitably, the pendulum swing of risk appetite has not yet settled and many lenders are demonstrating considerable caution.”
Mr Marwood said Grant Thornton’s survey found that a number of business were planning to grow their market share and more than a quarter of respondents expected to undertake mergers and acquisitions over the next 12 to 18 months.
“Emergence from recession means a need to finance increased working capital, and strong growth plans of successful companies will make this worse.”
