Navigating the current funding landscape
Alison Trant, director, banking and funding advisory, at PKF Francis Clark in Southampton, examines the outlook for businesses seeking debt funding.
In 2023, economic conditions were challenging, characterised by high input costs and interest rates. As a result, much of our workload revolved around refinance requests stemming from debt servicing issues and covenant breaches.
The Bank of England base rate reached its highest level in 16 years in August 2023, which continued to impact debt capacity and serviceability, leading to a rise in stressed and distressed borrowing cases. However, as we move further into 2024, overall conditions are showing signs of improvement, and the outlook appears more positive. There are expectations of material reductions in interest rates, with suggestions of up to 75 basis points by the end of this year.
Additionally, lending markets across the board continue to have plentiful liquidity, with banks eager to lend and alternative lenders and products expanding, offering corporate and commercial borrowers more options to refinance, improve working capital and raise funding for growth. Senior bank lenders remain cautious, as we would expect, but they are very much open and actively seeking lending opportunities. Alternative funding sources, such as challenger banks, debt funds and private credit, also have ample capital to deploy. These sources of funding seek a higher return for higher risk, but they are offering more flexible lending solutions.
These alternative lenders are engaging in creative discussions on structure and hybrid capital options. Some notable features include higher loan-to-value appetite for asset-backed positions, longer interest-only periods, interest roll-up, bullet repayment structures, and lenders participating in equity upside with minority equity options like warrants.
Continued rise of asset-based lending (ABL)Â
The rise of asset-based lending (ABL) providers continues to be significant, particularly in refinance and new debt raise requests. Notably, their specialist expertise in the construction and retail sectors has delivered solutions to businesses where high street lenders continue to exercise extreme caution.
The high street was very much open for conservatively leveraged, well managed, well capitalised businesses, and in many such cases we obtained a number of funding offers, bringing competitive tension to the process. But the ABL providers brought something different to the table.
Revolving facilities structured against suitable balance sheet collateral – be that stock, plant and machinery – provided higher quantum of debt and the revolving limit structure eased the debt servicing burden. We expect ABL to increase its role for all lending purposes this year and beyond.
Environmental, social and governance (ESG)
We also expect ESG to feature more in lending dialogues as the major banks drive their ESG goals and deploy intelligent tools to equip frontline staff and customers in these areas.
Borrowers, especially on larger debt transactions, will be expected to articulate and demonstrate their own ESG strategy, and major banks are supporting this with discounted borrowing rates for delivering improvements and/or specific ESG purpose lending products.
Outlook for 2024
Looking ahead to the second half of 2024, decision-making processes are expected to continue taking longer, as both lenders and borrowers exercise caution. Preparation of lending proposals will be crucial, with all lenders requiring good quality information, clear objectives, articulated strategy and high-quality financial data to support the request.
Talking to your professional advisers, who have significant experience of the whole debt funding market, lenders’ specific credit processes and evaluation, will ensure management teams save much time and frustration in a new or refinance process.
Overall, with a favourable interest rate forecast and eager lenders armed with capital, we anticipate a significant increase in both sides of debt funding activity as the year progresses. Whether it’s businesses seeking refinancing solutions or those aiming to fuel their growth ambitions, we expect growth in both the volume and completion of deals towards the end of the year.
For more information
email alison.trant@pkf-francisclark.co.uk or call 07787 668645.Â
