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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