The financing landscape is changing rapidly
Many entrepreneurs and managers are currently facing multiple crises: the war in Ukraine, disruptions to global supply chains, a potential escalation in the Middle East, the energy transition…! The consequences include high energy costs, inflation, economic uncertainty, and consumer reluctance to spend. Combined with the investments needed for transformation, this has led to a strained liquidity situation for many companies. While financing was not necessarily considered a critical issue on the agenda for a long time, this has now changed. The weakness of some banks also plays a significant role here. The first signs were the merger of Credit Suisse and UBS, as well as the bankruptcy of Silicon Valley Bank. The real estate crisis is further exacerbating the situation, and many banks have had to significantly increase their provisions for credit losses—the insolvencies surrounding the Signa Group are just the tip of the iceberg. Many are now asking: “Are banks still reliable financing partners for my company?”
The financing environment for businesses has also changed completely with the start of the interest rate turnaround in early 2022—at 4.75% currently, the ECB’s key interest rate is at its highest level since 2009. Many companies that benefited from favorable terms are now facing painfully high financing costs.
This is putting a strain on both profitability and liquidity, as increased interest costs can often be passed on to customers only after a delay—if at all. Some relief through an interest rate cut is likely to come no sooner than after the ECB meeting in June, provided the inflation outlook is confirmed by then. Only those who can pass on the increased costs directly to their customers will benefit from the fact that inflation reduces debt.
Which financing partners are still available?
An additional challenge is that traditional banks have become significantly more restrictive and risk-averse when it comes to lending. They are focusing on Tier-1 customers with high-quality assets and strong creditworthiness. Not only new business but also loan renewals are being viewed more critically than in the past. In addition to higher interest rates, this often means more collateral and shorter terms.
Certain industries with their own specific challenges are particularly affected by this, such as the automotive, real estate, and retail sectors.
Many companies are therefore grappling with the question of how they can best refinance themselves or raise new liquidity for necessary investments or a transformation.
Liquidity and financing security should be top priorities
In principle, every financing decision should align with the company’s long-term strategic goals and contribute to optimizing its capital structure and financial resilience.
In the current market environment, securing liquidity should be the top priority in order to remain flexible and able to respond to unexpected events at all times. Key components here include diversifying both funding sources and maturities and interest rates: A mix of various financing instruments, short- and long-term loans, and fixed and variable interest rates reduces refinancing risk and the volatility of financing costs.
In addition, the financing structure should be tailored to the company’s cash flow planning by optimally combining amortizing and bullet loans, as well as potential PIK (payment-in-kind) components.
In addition to traditional loans, companies should also consider asset-based solutions. Here, the leasing or sale-and-lease-back of fixed assets plays just as important a role as inventory financing and the sale of accounts receivable. The resulting shortening of the balance sheet often has a positive impact on the credit rating, thereby facilitating traditional bank financing.
Debt Funds as an Alternative to Traditional Lenders
During the recent period of low interest rates, a great deal of capital flowed into private debt funds. By providing flexible financing structures, these funds have become an important financing partner for companies over the past few years.
They offer companies greater flexibility regarding maximum leverage, covenants, repayment profiles, and permitted dividends. Other key advantages include faster execution and shorter decision-making processes. In addition to traditional senior/unitranche financing, other structures are also possible (holding company financing, mezzanine, quasi-equity, etc.), which are particularly well-suited in the context of a transformation or restructuring.
The Importance of the Debt Story in the Financing Process
A structured financing process with a customized and well-developed “debt story” has become indispensable for successful financing. This story must address the key issues relevant to assessing credit risk:
‒ Does the company have a sustainable business model?
‒ What is the customer and supplier structure like?
‒ To what extent is profitability influenced by energy costs and raw material prices?
‒ What are the industry outlook and the company’s competitive positioning?
‒ How have the financial figures developed historically?
‒ Is the business plan plausible and robust?
‒ What investment needs will arise in the coming years?
‒ Are cash flows stable and sufficient to cover interest and principal payments?
‒ Are there any environmental, social, and governance (ESG) concerns?
All of these issues are thoroughly examined before a lending decision is made. Sufficient time and a liquidity buffer should be factored in for this, as these processes are currently taking longer than in the past due to staffing constraints and more rigorous reviews, and because usual partners may no longer be available.
The Advantage of Financing Advisory Services
International and publicly traded corporations have a comparatively easy time securing loans, as their business models and products are familiar to banks and a wealth of information and research on the company is available. In addition, during a crisis, they have better access to equity capital or, in the worst-case scenario, to government aid due to their national significance.
For large mid-market companies and smaller businesses, the effort required to secure financing is greater. A good financing advisor adds significant value to the financing process and can often be the decisive factor in a successful transaction.
On the one hand, they support management in advance as an independent and objective third party, both in developing a tailored debt story and a financing strategy that best meets the company’s objectives. On the other hand, they manage the preparation of the information package for the lenders and serve as the primary point of contact during the due diligence process. This significantly reduces the burden on management, allowing them to focus on running the business. In addition, the financing advisor possesses extensive expertise gained from a wide variety of transactions and a large network with direct access to decision-makers at lenders. This enables him to position the company’s project optimally and proactively address potentially critical issues.
