8/8/2019 Busmag Corp Fin Jun10

http://slidepdf.com/reader/full/busmag-corp-fin-jun10 1/1THE BUSINESS MAGAZINE – THAMES VALLEY – JUNE 2010

corporate nance 17

www.businessmag.co.uk

While there is widespread acceptancethat higher taxes and public sectorspending cuts are on the way, the bigissue worrying businesses right nowis constrained bank funding, writesRichard Willsher.

It all depends who you are. TheBank of England’s April 2010 Trendsin Lending publication and its Credit Conditions Survey for the first quarterof this year indicate that bank lending

to larger businesses is increasing andthe cost of borrowing falling. Thisis corroborated by the Associationof Corporate Treasurers’ spokesmanMartin O’Donovan who says that biggercompany credit spreads have fallenand well-rated businesses have beentapping the bond markets successfullyfor some time now.

However for SMEs the reverse is true.Demand and the cost of borrowingare both increasing while terms aretightening. This is worrying for smallbusinesses because it may inhibit theirability to grow and it was listed amongthe major concerns of business ownersin Baker Tilly’s Owner Managed BusinessReport published last month.

Across the corporate finance sceneas a whole, deals are being done.Researchers Dealogic point out thatglobally mergers and acquisitionshave risen by 15% as compared to firstquarter last year. In Europe transactionsare being announced although muchreduced in number and value ascompared to 2006, 2007 and the first

part of 2008.Locally, corporate finance adviserCharles Whelan of HW CorporateFinance says: “We saw a pick up in dealsin the first quarter. There is a realisationthat we are not going to go back to theheady days of 2007 in terms of pricingand business owners are realising thatlife has to go on.” He points out thatuncertainty surrounding the electionhas not helped in getting deals doneand also there is genuine concernamong some entrepreneurs about apotential rise in capital gains tax.

Management buyouts have stageda modest recovery, according toNottingham University’s Centre forManagement Buy-out Research,although secondary and even tertiarybuyouts dominate the activity. This

suggests private equity and bank funders are merely trading extantdeals between themselves rather thanputting new money into new buyouts.Christiian Marriott, a director of BarclaysPrivate Equity, comments with somecaution: “The strong start to the year ...may not necessarily signal a sustainedresurgence in the UK buyout market,rather a more gradual recovery over thenext few years as confidence returns.” Awidely held view is that private equityhouses are flush with cash raised forinvestment in 2006 and 2007 but areeither not yet sufficiently confident toinvest or unable to raise the leveragethat they need to fully fund new deals.

There is some positive news from thebanks themselves however. “There werenot many [merger and acquisitions]transactions last year though we sawquite a few re nancings,” explains Mark Frettingham, HSBC’s head of corporatebanking at the bank’s South CorporateBanking Centre. “Now most of those

have been done and we are seeing morebuoyancy on the M&A side .... We areseeing more players coming back intothe market as con dence and optimismimproves.” He says that vendors areless inclined to hang on to get toppricing for their businesses and thattransactions are happening where thereis a compelling imperative for them todo so. He does however sound a note of caution over those businesses that aredependent on public sector contractswhere the outlook may be uncertain.

At Lloyds Banking Group, AndrewFish, corporate finance director forthe Thames Valley and the south east,says that although credit decisions ontransactions are taking longer to comethrough, loans are now beginning tobe made against cashflow. This is incontrast to the secured lending thatmany banks have insisted on sincethe financial crisis. “What I’m findingis that well-managed businesses havemanaged to maintain their profitabilitythroughout the downturn and arenow pretty well placed .... If they havemanaged to maintain their profitabilityand cashflow over the past three yearsthen we can have confidence that theycan carry on over the next three or fouryears.”

In late April Lloyds announced that ithad provided a £4 million loan facility to

AIM-listed Alliance Pharma to assist thefirm growing organically and throughacquiring additional product lines. Butwhile doing such deals Fish says post-election uncertainty and the sovereigndebt concerns could still knock businessconfidence.

For smaller firms the going isparticularly hard. Adrian Alexander,Mazar LLP’s corporate finance partner,notes that bank lending usually has tobe secured and leverage ratios havefallen. Banks, he says, won’t look atbuyouts at the moment. “As far as M&Ais concerned there are more buyers thansellers but strategic trade buyers withcash to spend are in a strong position.”He says that despite the recession thereare fewer distressed businesses for salethan expected.

Alexander’s colleague AndrewBaxendine who covers the south coastincluding Southampton, Poole andwhose territory stretches as far as

Bristol reiterates that secured lendingis certainly the flavour of the month.Generally lenders are looking forlong-term contracts in industries suchas property maintenance, the healthsector and environmental testing,where cashflow looks certain for severalyears ahead. Businesses that tenderfor one-off contracts, healthy and wellrun though they may be, are finding itvery tough to raise funding from banks.On the whole acquisitions have beensmall and few and far between but heemphasises that he frequently comesacross well-managed businesses thatare doing well despite the difficulttrading conditions of the past coupleof years. “On the whole the businessclimate is not too bad in our area”, heconcludes.

All in all corporate finance in theregion is emerging from a periodin the doldrums. The larger, morecreditworthy businesses are findingit easier to raise funding and buybusinesses but for SMEs it is muchmore difficult. Banks and advisers arereasonably positive in their outlook but uncertainty over what the newgovernment might bring and howbusiness will be affected suggests thattransactions are unlikely to pick upsignificantly until 2011.

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Deals and lending

are slow to recover