John Williams is a Partner and the Head of PwC’s Debt & Capital Advisory Team, providing independent advice to companies and management teams to help them solve for financing issues they face. Examples of his work include refinancing existing debt facilities that are maturing, obtaining additional funding to support acquisitions or organic expansion, or recapitalising the business such that shareholders can crystallise some of their value without selling down equity. Here he introduces us to the ins and outs of debt advisory and tells us about the thought leadership tactics he implements when advising on cases that consider the use of alternative funding sources.
Over the past three years the funding landscape has dramatically changed – what have been the debt funding trends in the past twelve months?
Increasing use of Alternative Lenders. These debt funds were set up to fill the gap left by banks retrenching from the market post the financial crisis. The use of these non-bank lenders has grown year on year and now represents a significant proportion of the private equity backed mid-market. They are also increasingly focusing on the wider corporate market and moving up the size spectrum.
These lenders can provide more leverage, more flexible terms and also much bigger hold sizes than the traditional banks (up to £200m), albeit this does come at a higher price point.
One of the more recent developments in the market is the teaming up between Alternative Lenders and Banks. The borrower sees only one structure (often a bullet term loan) but behind the scenes a bank provides a lower priced super senior component, reducing the overall blended cost of the loan to the borrower. This reduces some of the pricing differential to typical bank facilities but yet still achieves higher leverage and greater flexibility
There is a huge amount of liquidity within these Alternative Lenders and this money is trying to find a home. The challenge for borrowers is that navigating the market is now becoming a full-time job due to the lending environment constantly evolving with new lenders entering the market and existing lenders at differing stages of their fund cycle, hence targeting different types of deal. This is one of the reasons why corporates are increasingly using debt advisers. At PwC we have one of the largest debt advisory teams in the market comprising ex leveraged and corporate bankers, dedicated resource to tracking these market developments and the support of the wider PwC network
What part does financial modelling play in the debt raising process and to what level is it considered as evidence by lenders?
Financial modelling is crucial as it will be used by lenders to structure the potential debt solutions. It will also form the basis from which covenants will be set and the business performance monitored going forward. It is not unusual for the financial model to be amended and updated during a “debt process” as further work and diligence is carried out. However, it is clearly unhelpful if these amendments are material and change structuring thoughts significantly. It is therefore important to be comfortable with your financial model before launching an official process with lenders.
What specific strategies do you employ when advising on cases that consider the use of alternative funding sources instead of the traditional banking sources?
We would always want to spend time with the management team to fully understand their objectives and what they need from a financing solution before deciding which route to recommend. It may be that flexibility (around covenants) is very important, or funding for future growth is required. Sometimes the objectives centre around cost savings and other times, it is maximising debt such that the shareholders can crystallise some of their value in the business without selling equity. It is also worth considering prior lender relationships that the business has, how they have supported the business historically and does that relationship need to be protected.
Once we have an informed view on these areas, we can model up a range of options. We often run multiple options in parallel and then choose the optimal solution at the end. This has the advantage of providing back-up solutions but most importantly it creates competitive tension in the debt process and drives the best terms available.