Expert panel discussion | Credit facilities in private equity
20 May 2020
At both a Government and business level, everyone is worried about the concept of building greater deficits and debt whilst we attempt to contain the spread of COVID-19 with potential to lead to years of stagnated growth. Business borrowing is set to hit record levels with SME’s and large corporations looking to take on unprecedented levels debt over the next few years. Some will likely exhaust their credit lines for even more cash.
Governments and investors generally seem to be supporting well-considered borrowing to ensure sustainability in the economy and specific businesses across multiple sectors. Measures put in place include even lower interest rates, state aid, business grants and relaxed regulatory framework at a Government level, in addition to revised guidelines from industry bodies such as the Investor Association and Institutional Shareholder Services group of companies (ISS) o reflect accommodating investor sentiment.
Trading conditions are far from ideal for most businesses and is placing unanticipated pressure on liquidity. Many businesses are re-focusing their attention to conserving cash and improving their working capital. In these uncertain times “Cash is King” and many boards/senior management teams are needing to act at a scale and urgency unlike we’ve ever seen before. Organisations are facing potentially significant cash management challenges to which they need to respond rapidly. It is vitally important to have better visibility of your cash positions, including associated currency/FX risks, in order to make informed decisions and improve liquidity management.
“Cash management challenges are often common to all businesses, and a rigorous and disciplined approach to collections, payments, and forecasting is crucial. We should not forget that investments and visibility on cash positions are equally important. Diversification has proven to be a mitigating strategy during periods of turbulence within the global financial markets. We are currently supporting clients to implement short-term solutions in their cash management and investment strategies in order to address the issues they are facing during these unprecedented and challenging times.”
“There are a number of companies in danger of having their credit ratings lowered, including banks and some financial institutions. Diversifying cash can alleviate the risks associated with conserving cash, and it is important to monitor.” Moricko Kemp, Lead Director of Treasury and Investment Services at SANNE
Drastic measures have been taken by some companies in furloughing their staff, cutting salaries, or making redundancies. Other ways of conserving cash are to consider share alternatives as a form of employee remuneration, and a recent webinar co-hosted by ProShare and Tapestry Compliance explored some of these considerations in more detail.
“There are many ‘What If’ scenarios being tested by companies at the moment, and the overriding objective seems to be that of conserving cash and considering alternative ways of sourcing shares to satisfy their share schemes.
Given the focus on conserving cash, ideas being explored by companies range from using shares to satisfy bonuses, existing or new awards to a new concept of paying executives salary in shares, or part thereof, as opposed to cash. We are supporting clients in their need to align their strategy with their remuneration policy, considering legal requirements for criteria of any allocations, ensuring continuous tax compliance, and considering relevant investor guidelines.” Carla Walsham, Managing Associate at Tapestry Compliance
Existing hedging strategy and the sourcing of shares needs to be considered by companies to minimise the risk of adverse movements in the value of liabilities linked to awards and options granted under their employee share plans. As an independent trustee, SANNE has been proactively engaging with its corporate clients to highlight the need to consider key factors such as headroom and dilution limits, probability of performance conditions being met (considering any adjustments where necessary), and cash flow impact on the timing of execution. This is something which requires dialogue between trustees and key stakeholders at the company, including finance and treasury teams, as well as institutional corporate brokers. We see Employee Benefit Trusts being a key consideration for cash conservation strategies being adopted by companies in relation to their remuneration strategies over the coming months.
To carry on in a crisis is not easy and it is sometimes difficult to see the wood for the trees. We are all aware that the COVID-19 pandemic is having a massive impact on the business operations of many companies and global securities markets. With many businesses needing additional capital to sustain and ‘future-proof’ or evolve and continue to deliver on strategic objectives during 2020, raising new capital will likely be crucial for the survival of many listed entities.
The law is adapting in many jurisdictions to address the need for capital raisings to proceed against a backdrop of distressed financial markets. Certain relief measures, subject to criteria, are being provided by regulators to listed entities looking to raise capital, allowing greater flexibility and quantum. The Financial Conduct Authority, for example, released a package of measures intended to assist companies to raise new share capital in response to the Coronavirus pandemic, whilst retaining an appropriate degree of investor protection.
Given there are still various criteria to be satisfied in placements or rights issues, even with short-form prospectus, some companies are looking to explore alternative and less-onerous ways of raising capital quickly. There are additional options available to companies when raising capital in the current environment, and the cash box structure gives companies the ability to raise cash without the need for a circular or shareholder meeting, and associated delay and expense.
“With current volatility of the markets and the need for companies to act quickly to raise capital, we are seeing a number of clients looking to utilise the flexibility of a cash box structure to support significant equity fundraisings. James Taylor, Managing Director, Co-Head of Investment Banking at Numis Securities
Investors have indicated a willingness to support equity fundraisings. High debt levels are already straining many companies, and the reliance on so much debt will likely elongate the economic recovery period after the pandemic eases. It is important for companies to consider attractive ways of financing the long-term operability and sustainability of its business in these testing times.
To read SANNE’s recently published briefing note on Jersey cash box structures, click here.
SANNE can assist with end-to-end services in the restructuring process. We would be delighted to speak with you to discuss how SANNE can assist. For more information please contact Shervin Binesh directly.