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Simon Allocca, Managing Director and Head of Loan Markets
David Cleary, Director, Corporate Debt Capital Markets
Marc Alldridge, Director, US Private Placements
For UK companies, the syndicated loan market continues to be an appealing source of funding. Not only does it provide funding flexibility whilst fulfilling core working capital and financing needs, it also gives companies the opportunity to identify and work with those banks that will support them throughout the cycle, as opposed to fair-weather banks that disappear when times become more challenging.
The loan market in 2012 is not without its challenges and volumes in the first quarter have been significantly lower than this time last year (see Chart 1), for a number of reasons. A significant number of borrowers carried out early refinancings of their facilities in 2011 when pricing and terms were more favourable and when liquidity was more certain. Additionally, the lack of opportunities for event financing has led companies to stockpile cash on their balance sheets, while macroeconomic uncertainties regarding the sovereign crisis in Europe and low economic growth in the UK have suppressed demand for borrowing.
The net result of these trends is lower demand in the syndicated loan market. According to figures from Dealogic, in the first quarter of 2012 overall volumes in the global loan market were down 20% year on year. In the UK they were down 43% and in Europe they were down 46%, which gives a flavour of how much the picture has changed since 2011.
Although there has been a limited supply of transactions in the last year, pricing remains very competitive and those transactions that have come to market have all been very successful. A great example of recent event financing is DS Smith, which acquired a division of SCA, a Swedish paper packaging company, earlier this year. Lloyds Bank underwrote a bank facility for that acquisition, which was heavily oversubscribed and well supported by the banks and the markets.
Many companies are looking to achieve diversity in their funding sources and are actively looking at the bond and private placement markets.The final choice will be determined by the company’s size, credit standing and the required debt quantum.
The bond markets opened the year strongly and whilst volumes in Europe have fallen of late, as concerns surrounding the Euro have resurfaced, the market remains strong as cashrich investors look to put funds to work. This, in conjunction with historically low gilt yields, is leading to very attractive coupons (fixed interest rates).The positive market sentiment demonstrated by the issuance from utilities and strong investment grade corporates has fed down the credit curve and enabled companies like Center Parcs to issue a high yield bond as part of their refinancing package.
We are also seeing a lot of interest from both companies and investors for retail bonds. Although issuance has been lower than we would have hoped going into 2012, we are expecting it to increase during 2012.
Meanwhile, the US private placement (USPP) market has become an increasingly attractive prospect for UK companies. Although overall volumes in the market so far this year are comparable to 2011 volumes (at approximately $16bn), this masks a sharp reduction in activity from US-based companies and an offsetting increase in issuance from non-US entities. (See Chart 2 for a breakdown of geographical spread.) In particular, volumes for UK companies were around 25% higher in the first four months of this year than they were in 2011. Demand for good quality UK companies is as strong as ever, and USPP is particularly attractive to unrated companies, as no credit rating is required. In addition, the USPP market offers longer tenors than the loan market, while offering competitive pricing and supporting multiple maturities.
The current economic environment in the UK is one of austerity, which is a difficult environment to grow in. While businesses are largely keen to expand – whether organically, by acquisition or both – they are reluctant to take positive steps to do so until they have greater certainty that the economy is moving forward. This is something of a vicious circle, as investment is needed to get the economy moving.
At a glance :Types of debt instruments
Loans• Bilateral – between two parties, up to £50m, term 1-5 years – e.g. overdraft, revolving credit facility
• Club/syndicated – between one borrower and a group of lenders, usually using services of an arranger, term 1-5 years
US Private Placements (USPP)• Fixed rate securities issued in Sterling, Euro or, most commonly, US Dollar
• Offering of securities exempted from registration with US Securities and Exchange Commission (SEC)• Information disclosure is kept private• Securities held for the long-term regardlessof short-term market fluctuations• Relevant for high turnover mid-market customers• Minimum requirement – £50m issuance size in 5-30 year tenors but 85% of issuance is 7-15 years
Public Bonds• Issued by larger corporates that are often rated by one or more ratings agency
• Minimum requirement of £100m but £300m+ preferable
• Extended tenors available: 5–30 years (Sterling), 3–15 years (Euro), 5-30 years (Dollar)
• Regulated and traded listed instrument
Funding and Capital Markets, 09/12/2013