Download Managing Banking Relationships

FINANCE & MANAGEMENT
Managing Banking Relationships
BY
David Martin & Noel Browne
Managing Banking
Relationships
David Martin and Noel Browne provide tips on best practice when
engaging with banks to get the most for your business.
David Martin is a Director
in Deloitte Corporate
Finance specialising in
Debt & Capital Advisory,
[email protected]
01 417 2522.
Introduction
Since 2008, the Irish Banking system has
gone through a period of unprecedented
change. What has emerged is a smaller
banking sector containing fewer active
players with a reduced capacity to lend.
However, the last 12-18 months have seen a
significant increase in activity from the three
main commercial banks in Ireland, namely
AIB, Bank of Ireland and Ulster Bank as they
seek to increase their lending volumes. They
have each established new business teams
with the aim of increasing their lending to
viable businesses across Ireland.
Rebuilding your banking relationship
Noel Browne is a Senior
Manager in Deloitte,
specialising in Creditors’
Voluntary Liquidations
and Formal Personal
Insolvency Arrangements,
[email protected]
01 417 2578
Managing the interaction with a bank in
a professional and structured manner
is important. The last number of years
have seen the Banks focus on companies
cashflows compared to a previous focus
on companies balance sheets. Giving cashflow analysis requires a greater level of
detail to assess any lending proposal, a
Bank typically requires a detailed business
plan which includes, but is not limited to,
the following;
• profile of the company and the key
management team;
• an outline of the what the company is
seeking and how the funds will be used;
• historical audited accounts and up to
date management accounts ;
• detailed financial projections (profit
& loss account, balance sheet and
cashflow statement) with key underlying
assumptions;
• demonstration of conversion of EBITDA
to free cash flow and understanding of
working capital movements with details
of key creditor and debtor terms;
• details of the borrowers’ position with
the Revenue and other creditors;
• financial model demonstrating how the
company is going to repay their debt and
over what timeframe.
24
The analysis of the above information
leads to debt service cover and interest
cover ratios which will be assessed by the
Banks based on a company’s existing and
projected cashflows (these cashflows will
be sensitised to take account of unexpected
events). These ratios will typically lead
to an assessment of an appropriate Net
Debt to EBITDA (Earnings before interest
tax, depreciation and appreciation). The
Net Debt to EBITDA multiples vary greatly
depending on the sector, business valuation
and the tangible underlying security if
available. In our experience, a leverage
multiple of up to 3.5x is achievable for
trading businesses. In cases where the
debt is supported by assets, the banks
tend to provide higher leverage multiples
over a longer time period if they fit all other
appropriate criteria.
The approval by a Bank of a lending
proposal is only the first step for a company
in their negotiations with the Bank. The
terms and conditions, the cost of the
capital, covenant package, debt service
cover, the level of amortisation of the loan
and refinance risk are key considerations
for a business in assessing what is the
appropriate level of debt for a company
to take on. Poorly set covenants will
increase the level of default whilst onerous
repayment obligations will hamper the
company’s ability to grow as it uses its free
cash flow for debt service obligations.
Once an initial relationship has been
established with a Bank it is important for
companies to develop a strong partnership
with their banking representative. Providing
your banking partner with; (i) regular
financial updates and (ii) notifying them of
any potential material issues in a timely
manner is essential. In essence, banks
don’t want to be surprised by any material
issues so the more they know about your
business the more likely they are to work
with you if any issues face your business.
ACCOUNTANCY PLUS. ISSUE 01. MARCH 2015
FINANCE & MANAGEMENT
BY
Managing Banking Relationships
David Martin & Noel Browne
Company options in terms of dealing
with unsustainable debt
Creditors’ voluntary liquidation
Given that many companies entered
into large levels of debt in the period
2003 to 2007, some of which was based
on property valuations rather than the
sustainable cashflows of a business, there
are a significant number of SMEs that are
burdened with unsustainable debt levels.
Although a large portion of the lending was
to limited entities many business owners
provided personal guarantees which has
placed their personal solvency in jeopardy.
A creditors’ voluntary liquidation is the
liquidation of an insolvent company. The
process is instigated by the company where
the directors are satisfied that the company
is insolvent and unable to pay its debts
as they fall due. A liquidator is appointed
over the company who is then responsible
for realising the assets of the company on
behalf of the creditors and shareholders.
The executive powers of the directors over
the company effectively cease upon the
appointment of a liquidator and ultimately
the company is legally dissolved.
Given the scale of deleveraging by banks
operating in Ireland, i.e. CBRE estimate
that there was c.€21 billion paid for Irish
originated loans in 2014 alone, many
companies and their advisors will have to
negotiate with loan acquirers (Lonestar,
Apollo, Goldman Sachs, Carval etc) and their
administrators in relation to loans which
they have purchased.
In our experience, there is a significant
variance between many of the loan
acquirer’s objectives and how they interact
with companies. Understanding both
the company’s and the loan acquirers’
objectives are key to negotiating effectively.
If you are in a position where your debt
is unrepayable or refinancing the debt
is not achievable our experience is early
engagement with your funders is advisable.
Some Banks are “parking” debt for a
number of years in an effort to provide
sufficient time for customers’ trade and/
or asset values to recover sufficiently to
repay their debt in full. Furthermore the
increased prevalence of alternative lenders
and equity providers in the market has
increased the likelihood of companies
being able to raise new money in order to
refinance their existing debts.
Formal Insolvency Schemes
In scenarios where a consensual agreement
cannot be reached there are formal
mechanisms available to corporate and
personal borrowers, such as;
• Creditors’ voluntary liquidation
• Personal insolvency arrangements
• Bankruptcy
ACCOUNTANCY PLUS. ISSUE 01. MARCH 2015
Personal insolvency arrangements
In December 2012, the Personal Insolvency
Act 2012 was signed into law. The Act
provides for three new forms of personal
insolvency that can be invoked, being a
Debt Relief Notice (DRN), a Debt Settlement
Arrangement (DSA) or a Personal Insolvency
Arrangement (PIA).
A Debt Relief Notice (DRN) allows for the
write-off of qualifying debt up to €20,000,
subject to a 3-year supervision period
with an exit at the earlier of payment of
50% of debts or three years after entering
the process. A debtor is entitled to a
reasonable standard of living and can only
obtain one such relief notice in a lifetime.
A Debt Settlement Arrangement (DSA) is
a scheme of arrangement formulated by a
licenced Personal Insolvency Practitioner
(PIP) and only includes unsecured debts
with no limit on the amount of debt. A
debtor is provided with protection from
unsecured creditors and debts are settled
over a period of up to 5 years (extendable
to 6 years in certain circumstances). A DSA
must be agreed by the debtor and approved
at a creditor’s meeting by 65% of creditors
(in value). In addition it must be processed
by the Insolvency Service of Ireland (ISI)
and approved by the Court. If successfully
complied with, the debtor will be discharged
from debts specified in the DSA at the end
of the period.
secured debt. The secured debt is limited
to €3m, unless written consent is obtained
from all secured creditors. A PIA must be
agreed by the debtor and approved at a
creditors’ meeting by a qualified majority of
creditors. In addition it must be processed
by the ISI and approved by the Court.
Under a PIA, a debtor’s unsecured debts
will be settled over a period of up to 6
years (extendable to 7 years in certain
circumstances) and the debtor will be
released from those unsecured debts at the
end of that period. Depending on the terms
of the PIA, the debtor may be released from
secured debts at the end of PIA period
or the secured debt can continue to be
payable by the debtor. Both the DSA and
PIA can only be availed of once in a lifetime.
Bankruptcy
A further option for personal borrowers
is Bankruptcy which is a process where,
under the supervision of the High Court
and the Office of the Official Assignee, a
debtor is protected from further action
by creditors. The assets of the insolvent
individual are realised and creditors are paid
in a strict legal process where the Official
Assignee determines the manner in which
the assets are realised and distributed.
Standing alongside the amended bankruptcy
legislation, the Personal Insolvency Act
2012 substantially reduced the period of
bankruptcy from twelve years to three years.
Conclusion
In our experience many of the banks are
keen to support existing and new clients
as they expand in addition to assisting
companies address their unsustainable
debt levels. However, in extreme cases,
where an agreement cannot be reached
amongst creditors, there are formal
mechanisms available.
Many borrowers require advice in dealing
with their bank in what can be a complex
and time consuming process, obtaining the
right professional advice is important in the
short, medium and long term.
As with a DSA, a Personal Insolvency
Arrangement (PIA) involves the appointment
of a licenced Personal Insolvency
Practitioner (PIP). It differs from a DSA in
that it includes both unsecured debt and
25