(Q) (gtnews): How has the market changed since 2007?
(A) (Paul Clark, executive director, capital and debt advisory, Ernst & Young): Having access to capital (both debt and equity) is becoming a competitive advantage in the current market. Debt has become increasingly difficult to obtain as banks start to feel the impact of increased regulation, Basel III and a tightening of global funding markets. Banks also now have a greater focus on understanding risk and lending to stronger (less risky) companies, looking to avoid the bad debts levels that occurred post the global financial crisis (GFC).
(Q) (gtnews): Will banks make the same mistakes again?
(A) (Clark): It is unlikely we will see the same amount of turmoil and financial distress in the banking industry. The reformed Basel legislation is now more systemic and requires all financial institutions to hold more capital for riskier companies.
Banks that had strong risk management systems and efficient funding models and operated in highly regulated environments (e.g. the Australian and Canadian banks) outperformed during and post – GFC, and there are many lessons to be learnt from these institutions.
With a better understanding of the capital cost of each customers, a wide-spread price-based competition in the business and using price to acquire better quality customers, banks will be better placed to weather turbulent times.
(Q) (gtnews): Why is refinancing so important?
(A) (Clark): During and post the GFC funding costs have increased, particularly for longer-term maturities and availability has been limited. This has meant that larger companies have been accessing alternate markets such as bonds and US Private Placement (USPP), while smaller companies either reduced debt levels or borrowed for shorter terms.
This reduction in loan terms has given rise to an increase in the level of debt maturing in next 12 to 18 months. Coupled with an increasing tightening in funding markets and subdued equity markets companies need to ensure they have secured their funding. Access to funding at the right price, for the right term and under the right terms and conditions can make a significant difference to a company’s performance.
(Q) (gtnews: What is best practice in refinancing?
(A) (Clark): Always be prepared (i.e. up-to-date financial information, understand the market and keep talking to your bankers) so that you have the ability to move quickly. You don’t always need to wait until your facilities expire before you refinance. Other suggestions include:
- Ensure your banks understand your industry, business and financial strategy.
- It’s important to diversify. Make sure you don’t become reliant on a single source of funding (i.e. have relationships with more than one bank and try not to be totally reliant on bank debt).
- Identify the risks inherent in your business and make sure you have strategies in place to minimise them.
- Provide your banks with detailed and current financial information and develop robust forecasts with evidence to support the assumptions inherent in the forecasts. Make sure what you submit is achievable and realistic.
- Minimise the level of debt required. Make sure you have maximised our operating cash flows (better collection practices, extended trading terms and sale of non-core assets) before you refinance. There is no point paying for funding you don’t need.
- Work out what you want before you talk to the banks. Talk to other chief financial officers (CFOs), treasurers and advisors about what is happening in the market. Determine what level of debt you want, what security you are willing to provide and what covenants you are willing to accept.
- Simplify your corporate structure. If possible rationalise your corporate structure by closing dormant and unnecessary companies.
- Ensure you have the most effective debt structure in place. Many companies tend to have multiple loans with differing maturities and sometimes different interest margins, fees and charges. Try to consolidate these loans into fewer loans (and potentially one loan) to minimise fees and charges and reduce complexity.
You only get one chance to make a good first impression. So make sure your company is well prepared before you speak to the banks.
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