Steve King, regional director, London, Santander Corporate Banking
Malcolm Durham, chairman, FD Solutions
Graham Prothero, finance director, Development Securities
Paul Holmes, group finance director, Blues Clothing
–How have you raised corporate finance for your business?
Graham Prothero (GP): Bank finance for most markets – and certainly for real estate – dried up because the banks were facing a mountain of debt. We’re pretty cautious in the investments that we make and in the way that we structure our debt and equity. We were able to make all the relevant pay-downs on our loan-to-value ratios, but that meant that we had no spare cash to go out and exploit a market that was offering some wonderful discounts. The only route was to equity and we went to the market in the summer of 2009, and in the summer of 2010.
Paul Holmes (PH): We did a management buy-out four years ago. We financed 40% with a bank loan, 30% with mezzanine finance from a private equity firm, and 30% for the previous owners taking a roll-over of their debt. We’ve then increased the business by about 70% in terms of turnover and probably about double in terms of profitability. We also to re-banked from a bank that was probably one of the most troubled from the recent financial problems to Santander. That put us in a position to look at acquisitions and at furthering that growth story.
Malcolm Durham (MD): We’ve been involved in two flotations, one of which went ahead and one of which didn’t. A few years ago they would have both have gone ahead but people are being more cautious. We finally did a small venture capital transaction in a good software business, but it took three attempts and 15 months. There was a lot of heartache in between and a lot of people having to make concessions that they wouldn’t necessarily have made before.
Is bank finance available?
Steve King (SK): The funding is available for well run companies. A big part of the assessment lies in the bank forming a view of the management of that business: their understanding, the skill sets and how robust their own management structure is. What has changed in the last few years is the creativity that’s gone into some of the banking solutions. Businesses are working with the credit teams in the banks to understand the needs and the cycles within that business, and to put structures in place that might be a combination of different types of products and services.
How have bank solutions become more creative?
GP: I was struck by Steve’s comment on the creative approach to working with a business, which is very much something that we’re benefiting from now. The immediate reaction in the banks – when they emerged blinking into the daylight after the crash – was that the bars were set very high. What I have seen over the past 12 months is a much greater willingness to negotiate. It does take longer but there is generally a solution, and I think the word creative is quite key to that. That’s a very healthy environment for lending. It means that we are likely to get the financing we need, and the lender is likely to get the servicing and the protection that he needs.
MD: It’s refreshing to hear Steve talk about creativity. The Institute of Chartered Accountants’ survey in January found that there was a lot of inflexibility among some of the existing banks. But we’re hearing that Santander can take a more holistic approach to it. Steve mentioned management and I fear that some of the other banks are stuck in a legacy position of doing credit scores and managers being unable to make the decisions they want to make: they’re feeling disempowered. But the likes of Santander are able to provide the service that large companies are used to and can expect, and it is also available to some SMEs who go to the right places.
SK: The creativity bit is important but it’s also about relationships because it’s about the banker understanding the client – the good and the bad – and being very open and honest in terms of what’s going on in that business. I think that trust has got lost a little bit with the banking industry because of what’s gone on previously, so it’s incumbent on us to rebuild that trust.
What is the panel’s view on SME debt finance?
SK: The relationship model is a relatively expensive one in terms of investing the time, so it’s difficult to get that close to a particular client who’s at the bottom end of the SME environment. There is sometimes a difference of opinion as to what is provable and sustainable in the level of earnings in a business, and in how long you need to see that level to get comfortable that it is sustainable. We see a number of propositions where we aren’t able to assist a client, because they need equity going into that business rather than debt. We can only put debt in place when we can get comfortable with the near-term cash flow – we have to see visible, provable, sustainable levels. When it’s further out or it’s too forecast-led, we just can’t get that comfortable – that’s when you’re in the equity territory.
PH: The struggle I have with some forms of asset-based lending is that some of the companies we’ve looked at get into decisions that are counter-intuitive and put off the hard decision of being unprofitable and being in negative cash. They’ll say they can get debt finance on their stock and debt finance on their debtors. They’re less concerned about trying to change the model from making it more profitable or trying to change the working capital around to actually get their stock and debtor numbers down.
GP: The vast majority of our borrowing is asset- or project-based. I would hesitate to use the phrase cash flow lending, but it would be useful to me to have a facility to add flexibility. I have some spare equity but I can see a point when I’ll have spent most of that, and it will be useful to have something that was more flexible.
Is there appetite for stock lending?
MD: There are specialists in the market that produce stock lending, and I’m sure Paul’s had some experience of it because it particularly applies in his area. It’s only going to apply in areas where stock is readily saleable, but I don’t find any appetite amongst banks to look at the smaller businesses where they have stock to use that as any form of security. And I’m wondering whether there could be a move towards recognising those sorts of assets.
SK: We’re evolving in terms of our offering. We haven’t moved into the area of having product signed off that is a stock-based funding product, which generally works in conjunction with our invoice finance line. At the moment, it wouldn’t go as far as widgets or bits and pieces for cars – it would tend to be more in the commodity end of the market, so it might be things like aluminium or steel or something like that. But you may well see that evolve because we’re continually having to look at what we can do, and adapt that for what our clients want. If you look at invoice finance 20 years ago, it started out fairly restricted and it has expanded, so I’m hopeful that will happen.
Are companies exploring trade credit insurance to gain further lending from the banks?
SK: We’re seeing more companies exploring trade finance options and putting structures in place that will help their business grow as they come out of a difficult trading period. Some of those solutions are much more flexible than just having an overdraft that may be fixed at a certain percentage of debtors. Having a trade finance solution that actually works against your business and the flows of your business is a much more flexible solution. It is very visible from the bank’s point of view because they can see the trade growing, they can see the trade sitting behind that, and they are much more comfortable to go with you on that journey as your business grows.
PH: The trade finance element has increased. One of the things we noticed during the recent commodity rise was a sudden requirement from the suppliers. They needed more cash and weren’t that sophisticated about how they were going to deal with cotton prices doubling and general commodity prices increasing. A number of our competitors were having to give large cash deposits, which is never a good way of doing business: the letter of credit was a much better way of working. There’s been a rapid shift in trade finance just to cope with the commodity rise.
How do people feel about the Enterprise Finance Guarantee scheme?
MD: I liked the Small Firms Loan Guarantee scheme. When EFG arrived, I was very optimistic but our experience has been mixed. I’ve had companies make applications who are told they’re not suitable for it, but some people have had it. There does seem to be a reluctance among the banks to use it, and I don’t know if Santander does use it, but I would like to see it more available.
SK: We do use it and we are expanding our use of it. It’s obviously aimed at certain sizes of companies, so when you look at an SME environment, some will fit within the definitions of that scheme and some of them won’t. It has expanded now in that we do enterprise finance guarantee for exporters as well, so we’re trying to boost the export market through that particular route as well. But it is a guarantee to support a banking proposition; it is not a cause to lend. The bank has to get comfortable that the serviceability is there. The guarantee is just to give that extra bit of comfort. So the scheme supports lending against serviceability, and not just lending because there’s security or a guarantee sitting behind it.
This web seminar was sponsored by Santander and a full version can be viewed at http://finance.brighttalk.com/node/875