8 minute read 10 Feb 2023

        

How to negotiate with your banks and lenders in uncertain times

How to negotiate with your banks and lenders in uncertain times

David Martin
By David Martin

EY Ireland Strategy & Transactions, Capital & Debt Advisory Partner

David is focused on finding solutions for his clients with a range of lenders from Banks to the ever-increasing Alternative Lenders in Ireland and the UK.

8 minute read 10 Feb 2023
Related topics Strategy and Transactions
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David Martin, Partner and Head of Debt Advisory discusses what businesses should consider in negotiations with banks & alternative lenders in the current economic environment.

In brief
  • Borrowers are navigating difficult trading conditions.
  • However, the growing pool of lenders results in a more competitive landscape and choice for the borrower with increasing debt options available.

The economic headwinds which have faced the Irish economy recently and are likely to continue into 2023, predominately relate to:

  • Rising interest rates
  • Rising inflation
  • Energy price fluctuation

These headwinds have had an impact on Irish borrowers who may have both existing debt and new debt requirements with banks and alternative lenders. The world since 2010 has seen very low interest rates which has allowed some companies borrow money cheaply and use debt as a mechanism to finance business growth. 

Whilst we are still seeing a healthy appetite from both domestic and international lenders for funding both new debt requirements and refinancing, these headwinds have also had an impact on lenders as they now face (a) tighter credit conditions, (b) elongated decision-making processes and (c) tightening of sentiment. Borrowers are navigating difficult trading conditions which results in cases of:

  • actual or potential breached covenants
  • issues in meeting debt obligations and therefore potential events of default
  • funding deficits against their business plan
  • refinance risk

Debt plan for discussion with lenders

As part of a debt plan and working with your advisor companies, you should consider some of the following items:

1) Present to the lender early

Both traditional and real estate companies should present to their lender early, whether they are looking for new debt, facing a refinance or covenant breaches, by presenting a critically assessed, recast set of numbers with robust assumptions, lenders are more likely to provide covenant waivers or recast covenants. This plan should be after you consider the following “self-help” measures your company has undertaken.

  • Enhancing revenue and portfolio optimisation: identify and remove loss-making products and services
  • Price: understand and demonstrate what costs can be passed on to the end user
  • Improving margins: demonstrate to your lender how you have improved margins, and mitigated against rising costs
  • Productivity and efficiency improvements: ensuring costs are controlled
  • Labour cost management: deliver an employer value proposition to manage wages and retain talent
  • Policy optimisation: reduce cost base through regulatory & government supports
2) Be proactive with Revenue/creditors/customers

Commence discussions with Revenue and other creditors in a timely manner to set out appropriate plans and continue to engage with customers to understand your receivables timelines.

3) Forecasts/covenants/debt requirement
  • It is important to demonstrate the impact of the self-help measures the company has taken on the forecasts of the business and how this impacts your financial covenants (for existing borrowers) or projected covenants (for a new borrower).
  • The self-help measures and the financial model outlining forecasts should result in you fully understanding the funding requirement of your company, which in turn helps you identify the debt ask from the lender.
  • Assess your facility agreement and ensure you fully understand the terms and conditions of your lending documents, including all covenants, what your covenant headroom is and all events of default that are in your lending documents.
  • Having established the funding requirement of your business, being able to demonstrate to a lender how they are getting repaid is a key part of your negotiation. Whilst banks and most debt funds will usually expect repayment to come from the free cashflow of the business, some debt funds and special situation funds will look at repayment from other sources including the sale of assets, partial disposals and other liquidity events.
4) Additional sources of capital:

Some companies are carrying a high net debt:EBITDA, high loan-to-value and low interest cover ratio.  A review of the capital structure of the company and these key leverage ratios as well as the ability to service principal and interest will be a key determinant in understanding if your business should look at other sources of capital to meet your company’s funding objectives in the short, medium and long term. Consider if there are other sources of capital from your existing debt provider or other debt and equity providers that you could access.

5) Regular review:

Ensure your cashflows and revised strategy are kept under regular review and the requirement for additional sources of capital is reviewed on a continuous basis. Stay up to date with government supports available for your company and consider your hedging policy against best practice and regularly review.

6) Recovery:

The presentation/discussions with your lender, restatement of your cashflows and plans where applicable for additional sources of capital needs to demonstrate that you are on the path to recovery and the lender will get full repayment.

Stephen Prendiville, Head of Sustainability at EY comments “Lenders and their credit committees are increasingly expected to include graduating sustainability covenants and climate risk assessments when considering applications for finance. This will apply to long terms and short-term lending alike. Borrowers that engage meaningfully and embed sustainability in their application and associated analysis, can expect more positive attention.”

Debt solutions available

When negotiating with your lenders from overseas there is a range of options which may be helpful. Despite the previously outlined headwinds, there are numerous international lenders who see Ireland as an attractive destination for debt transactions. 

Previously many companies saw their debt solution as a “banks vs alternative lender” solution; however, we are working with a number of companies where banks are working alongside alternative lenders, working capital specialists, private placement and bond issuers thereby demonstrating that different debt solutions can co-exist for companies. This growing pool of lenders results in a more competitive landscape and choice for the borrower, thereby increasing their debt options. Having a mix of lenders attracts different terms and conditions for different funding needs but can also result in diversification of your refinance risk which is an important criterion in your debt negotiation.

Some of the types of debt companies should consider:

  • Growth finance – Expansion?
  • Acquisition finance – Buying another business?
  • Real estate specialist lenders - Development/acquisition?
  • Refinance – Existing debt / amend & extend?
  • Recapitalisation – Capital structure optimisation?
  • Special Situation – Liquidity funding?
  • Private Placement – Long-term debt?

There are numerous solutions in the marketplace to the type of debt required but as a summary here are some of the types, terms, and maturity timelines.

 
Senior Debt
Mezzanine
Unitranche

Type of Funding
  • Traditional first ranking debt provided by banks 
  • Structured with Amortising/Bullet repayment (e.g. Term Loan A (55%) / Term Loan B (45%))
  • Mezzanine financing is a subordinated debt instrument that enables leverage above traditional senior debt levels 
  • It ranks junior to senior debt and requires an intercreditor agreement to be put in place
  • A debt instrument which combines senior and mezzanine into one facility, eradicating the requirement for an intercreditor agreement 
  • Unitranche providers cannot provide working capital lines or clearing facilities, therefore if this option is pursued a clearing bank would be required
  • Clearing banks can fund overdraft or RCF on a super senior basis

Funding Terms
  • Terms to be negotiated but typically include:
  • Tranche A amortises over term
  • Tranche B bullet repayment
  • Arrangement fees (subject to negotiation)
  • Full Security structure
  • Terms to be negotiated but typically include:
  • Cash pay or PIK (or mix)
  • Bullet repayment at end of term
  • Arrangement fees (subject to negotiation)
  • Back ended fees or profit share arrangements
  • Terms to be negotiated but typically include:
  • Non call periods 2 - 3 years
  • Amortisation flexibility
  • Cash pay or PIK (or mix)
  • Arrangement fees (subject to negotiation)
  • Full security structure

Maturity
  • Avg. of 5 years
  • Avg. of 5+ years
  • Avg. of 5 years

Conclusion

Economic headwinds are likely to continue into 2023, with the lack of certainty due to inflation and geo-political events. Likewise, most commentators are expecting interest rate rises in the EUROZONE to continue into 2023.

Summary

Whether your company is considered over leveraged or not, a well thought out debt plan will allow companies to access the numerous appropriate debt structures and lending options available to Irish companies in the market.

About this article

David Martin
By David Martin

EY Ireland Strategy & Transactions, Capital & Debt Advisory Partner

David is focused on finding solutions for his clients with a range of lenders from Banks to the ever-increasing Alternative Lenders in Ireland and the UK.

Related topics Strategy and Transactions
Upvote