Coronavirus stress test needed, says debt adviser

As the global economic lockdown continues, Tom Lloyd-Jones, founder and MD of mid-market debt advisory house Zenzic Partners is fairly positive about the prospects for economic recovery. But only on the basis firms can pass a resilience test in response to the coronavirus threat.

“I am optimistic by nature and I think there are grounds for optimism. There has been a lot of talk around ‘will there be a V shaped recovery?’. I think there are some grounds for that, because there wasn’t really anything desperately wrong with the fundamentals of the economy.

“While some people would say we’re coming to the end of the cycle, there is plenty of evidence to show that post-election, post-Brexit there was grounds for the economy looking up. If we can get to a situation where lockdown restrictions are lifted, at least in part, we will start to see a recovery,” he says.

Lloyd-Jones, who founded Zenzic six years ago, says the 80 financiers he has spoken to in recent weeks- a combination of banks and non-traditional lenders-  have offered a mix of views on their appetite to finance firms in these testing conditions. “Some of them say yes, we definitely are open for business, then there are some contrarian investors that think this is the time where you can capture market share, you can win clients, you can reap more, by proving your worth.

“There are others that say even before you talk to new people you have to focus on existing clients, so a moratorium on new business for the time being is in place. Then there’s others who say look we may be restricted to sectors we think are more resilient. They may say we want to see a coronavirus analysis of new applications, to see they’ve done the work on scenario analysis and stress testing on the coronavirus impact,” he says.

Lloyd-Jones says that any short term financing is going to require some sort of coronavirus stress testing “front and centre”. He says this this even likely to apply to financing that was being put in place before coronavirus hit. “Before the first case landed in the UK, we were advising to put coronavirus adjustments into banking covenants,” he says.

When it comes to government initiatives, Lloyd-Jones says the CEOs and CFOs he has been talking to have been broadly positive of measures such as business interruption loans but added some felt they were “lacking clarity over eligibility”, in some circumstances. “What’s less well served is the middle market, not the small guys nor the investment grade, but the companies in between. They might have an emergency caused by coronavirus , it could be covenant breaches, it could be bridging financing is needed, or it could be the need to deleverage a bit.”

For companies in this situation, the demand on traditional sources of financing such as the larger banks is greater than ever, but there are challenges meeting demand. “The anecdotal evidence is that banks are doing all they can for existing customers, and they are supportive, but they are constrained by the sheer demand for business interruption loans.

“I don’t think its about risk weighting capital issues, I think its amore a human resource factor. They’ve got almost everybody ringing up their bank, saying this is what is happening to me, I need forbearance or I need a bit of understanding or this is what I want to do, I think that combined with people working from home, not being in the office, makes it an unprecedented surge that is going to be difficult to service,” he says.

“You want to call on traditional banking relationships in times of difficulty, but it shows the need to have diverse forms of funding, as you don’t want to be reliant on one form of capital. It really does come home in circumstances like this,” he adds.

Alternative thinking

Lloyd-Jones says there is a huge array of non-traditional lending alongside bank finance to draw on, saying that half of funding now comes from the banking sector compared to 93 percent before the financial crisis. “There’s a huge depth now in debt capital markets, that really wasn’t there in the 2007-8 financial crisis.

“London is the centre in Europe of this type of financing. There are a large number of private debt funds specialising in areas such as capital structure and asset financing, that can do it quickly. They typically have very flat decision-making processes and have been through a credit crisis before, and are prepared to invest,” he says.

As well as servicing corporates in various degrees of stress, the breadth of financing opportunities are equally beneficial to companies in what Lloyd-Jones describes as “neutral events such as a ‘plain vanilla’ refinancings.”

“If the term is coming up on your loan, you may think ‘how do I get this done in this environment?’ It may be that you need outside traditional funding sources, and the good news is that there is plenty of choice out there,” he adds.

Lloyd-Jones, whose firm specialises in both debt advisory and lending, says that there are examples of corporates continuing to raise capital in the midst of the challenging conditions. He says that despite the challenge of parties working remotely because of the lockdown, technology has allowed transactions to continue.

“Financiers will always want to meet the borrower, especially if it’s a new relationship. It would be difficult to advance sums to somebody they’d never met, but now with Zoom and Skype that can be done, and transactions are getting done,” he says.

The example of London councils pushing through planning applications virtually, is presented by Lloyd-Jones as an illustration of how major transactions can be achieved during the lockdown. “I thought it was very encouraging that they were able to act so quickly to it, to address the pipeline of planning applications. Similarly, you can hold credit investment committee meetings virtually. Decision-making can happen in the absence of an office,” he says.

Addressing the market

Zenzic was launched by Lloyd-Jones and Nadine Buckland in 2014 when they recognised that debt capital markets had become more fragmented, offering a wide range of finance. “There was a massive move out of banks into non-bank finance, mirroring what had happened in the US 20 years earlier,” he says.

At the time he was working in the private debt team of Big Four accountants EY, advising clients on a range of private debt transactions, when he realised there was a big swathe of companies in the middle market really weren’t that well served in terms of financial advisory services. “The big guys, the investment grade companies, they had the investment banks, but if you dropped down beneath that, while there was a clutch of very strong boutiques and the Big Four accountants, it was underserved,” says Lloyd-Jones.

“What we were doing at EY was innovative and entrepreneurial, but we thought we could do this outside EY where there are certain constraints on working in a big organisation.

Zenzic was set up initially as a private debt advisory business, advising mid-market cap companies, private equity houses on private debt transactions, on asset and corporate financings through to more bespoke situations like financings on FX swaps. “We added a debt capital market offering, the same thematic there, we thought mid-market firms were underserved by DCM.

“If you walk into the offices of Goldman Sachs or JP Morgan, these bulge bracket banks need to be doing ticket sizes of £200m plus typically, that’s the general rule of thumb. We can do smaller capital markets transactions using the same technology but allowing companies to start journey with an initial issuance of £50m,” he says.

“One of the things we’ve been thinking about now is the interaction between private and public DCM, and whether public DCM might be more or less resilient- the ability to span public and private debt markets the business now focuses on public and private on an advisory basis, and in 2018 we also added an investment arm, which makes our own debt driven investments in various sectors, typically asset backed sectors, real estate and other sectors,” says Lloyd-Jones.

“The idea now is that we are often on various transactions combining the advisory and investment function, on the same transaction. So we can advise clients where to put the bulk of their capital and we have investments alongside the capital, often doing the most difficult part, often a smaller piece of the capital structure, but it can be the piece that can be difficult to raise, but unlocks the whole transaction,” he says.

In the meantime, Lloyd-Jones is focused on the question of how corporates will survive in such a challenging environment, in order to prosper again in the future. “There is a view that businesses can’t just be turned on again like a switch, that there will be some time to ramp up. But that ramp up can happen relatively quickly with the right support,” he says.

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