What has happened to interest rates across Europe?
Over the last 18 months, interest rates across Europe have increased from a period of sustained lows after the Global Financial Crisis (GFC) to reach c3.5%-5%, and are now more akin to pre-GFC levels. In this article we examine how the increase in rates has impacted M&A transactions in the lower/mid-market and how an Integrated Asset Based and Cashflow financing package can help you in structuring deals in the current environment.
What impact have higher interest rates had on debt financing?
Higher interest rates have increased the debt service burden on borrowers and therefore reduced the amount of leverage that businesses can sustainably take on. This reduction has been more pronounced in unitranche structures versus traditional senior or Integrated ABL&CF structures, resulting in the leverage gap between the two reducing.
In addition to this, dealmakers are acutely aware of the negative impact that higher levered, more expensive debt packages can have on deal IRRs when compared to a slightly lower levered but cheaper funding solution – particularly when investments do not quite hit their equity case.
How our Integrated Asset Based and Cashflow financing package can help you structure in this environment
An Integrated ABL&CF structure can mitigate these factors by providing a cheaper source of capital for funding M&A, refinancing, recapitalisations as well as ongoing working capital, growth and seasonality.
Where appropriate, a portion of ABL funding (against Receivables, Inventory, Plant & Machinery or Fixed Assets) can be used towards a transaction. Amortising/bullet term loans and committed/uncommitted accordions can be overlayed on top of the ABL funding lines to provide a complete funding solution.
Crucially, the ABL tranches are priced lower than term lending from a margin and upfront fee perspective, thus when blended with the term lending tranches offer a cheaper day one cost of capital when compared to traditional senior debt and unitranche. In addition to this, the ABL funding is not subject to amortisation/clean down which also helps to keep down debt service outflows. The remaining balance of ABL funding is used to fund working capital and growth.
Where is it relevant?
Typically, it is well suited to:
- UK and Ireland-headquartered businesses delivering £3m+ EBITDA
- Key sub-sectors include manufacturing, wholesale distribution, B2B services, engineering, chemicals, print & packaging, textiles, transport & logistics, food & beverage, recruitment.
- Sponsor-backed businesses, where we can provide acquisition finance at the outset for M&A, but also strong appetite to refinance/recap portfolio companies, perhaps where the exit horizon has extended and a more flexible funding structure is needed (avoiding the need for equity cures), or where the sponsor seeks to redeem an element of the capital structure. Increasingly we are completing repeat deals with our sponsor partners.
- Privately-owned businesses, again to provide acquisition finance or to refinance/recap with more appropriate, flexible structure. Our funding structures can often provide more headroom and also have the ability to allow de-risking/cash-out for founder shareholders.
Investec led the way by establishing an Integrated ABL/CF offering 16 years ago – and continue to be leaders in this field. We have been designing and honing our bespoke offering, shaped by experience and dialogue with a growing number of management teams and private equity sponsors. Today, a team of 10 seasoned investment professionals within Investec’s wider Direct Lending team focus on providing this blended offering to mid-market companies in the UK/Ireland. (We also plan to extend our offering into the Benelux market in early 2024, building on our successful existing cashflow lending franchise there).
In response to borrowers’ desire for a relationship approach and efficient simplicity, Investec’s offering is deliberately delivered from a single team, a single credit process and a single set of legal documents (with no need for inter-creditor agreement if we are bi-lateral). The deal team will stay with the borrower throughout the life of the investment, building meaningful partnerships with management teams and sponsors to support them in their growth ambitions.
Our team is highly experienced and empowered to deliver. We believe in quick feedback, problem solving and a front-footed approach to getting deals done.
Unlike some other ABL providers who now have some modest additional cashflow lending capability, our mandate is bold. We are not constrained by shape of mix between ABL and cashflow tranches.
We typically provide bilateral facilities up to £50m+ and can lead-underwrite/arrange for higher quantum – with a proven syndication model.
75%+ of our clients have received significant follow-on funding for acquisitions and growth.
Our integrated structures mean that we are fully invested and aligned with other stakeholders – no risk of arbitrary reductions in ABL lines, particularly given meaningful cashflow lending tranches in our structures.
With a can-do attitude, Investec build long-term partnerships, helping to deliver certainty to transactions and support businesses as their funding requirements change over time.
Note: we can also provide pure ABL-only structures, where appropriate.
If you would be interested to learn more about how we could support you or your clients, please contact James Cullen or Nicholas Buxton