From Uncertainty to Opportunity
Written by Ronnie Bloom
In recent years, the theme of economic uncertainty has been all-consuming for many business owners and executives across the globe. If the lingering effects of Covid-19 weren’t enough to contend with, add to this global supply chain disruptions, rising interest rates, surging inflation, unstable stock markets, and mounting concerns over yet another global recession. Taken together, trying to anticipate and react to such ever-changing market conditions is a daunting task even for the most astute business leaders. While many of these issues and challenges are macro-economic in nature, and outside of a company’s direct control, their effects are felt throughout every size of business, from large multinationals to the sole proprietor. There are numerous options companies can choose in order to adapt to the realities of the prevailing economic landscape, with one fundamental element being their financing.
When Covid-19 first emerged, countless banks and alternative lenders hit the pause button on new business transactions. They began to refocus their efforts on evaluating the inherent risks within their existing portfolios. Not only were lenders reluctant to add new names to their portfolios, but borrowers themselves were equally hesitant to rock the proverbial boat and go so far as changing lenders. Instead, many opted for the certainty and comfort of what they had, even if it was far from perfect. That period, however, was short-lived. Lenders watched as loan balances shrank, with many companies electing to deleverage in part due to the copious amount of government Covid relief funds made readily available. Realizing the implications of the situation, debt markets have seemingly come alive. Lenders across the board have begun to aggressively chase what feels like any and every deal that comes to market, whether M&A or a straight refinancing. The rash of uncertainties facing the global economy and markets doesn’t appear to have tempered lenders’ appetites for new business. Lenders are now moving forward with aggressive loan structures, high advance rates, and low pricing. This begs an important question: with all the uncertainty inherent in the markets, what motivates a company to refinance and shop their deal around, given the time commitment involved in having to familiarize a lender with the inner working of their business plus the diligence process required? The answer for many borrowers is simple: opportunity.
Astute business leaders are recognizing the opportunities in front of them to refinance existing debt, whether for acquisition purposes or straight refinancing. Often, leading to securing a more flexible deal with fewer covenants, higher advance rates, and better interest rates. On the M&A side, companies and sponsors alike are taking full advantage of the frothy debt markets to secure financing for strategic acquisitions, which doesn’t appear to have slowed. In fact, the challenge for many is not in securing the financing for the purchase, but rather in winning the bid itself given the highly competitive landscape seen in the M&A market in certain sectors. While some of the considerations may have shifted throughout the pandemic, including pricing, valuation, or due diligence stemming from travel restrictions and quarantine requirements, there certainly has been no shortage of interested and willing buyers in the market. In fact, several opportunities FGI has looked at over the past few months involved cross-border transactions, with numerous buyers looking outside of their domestic market for value and opportunity. This has opened the global market for many companies willing to take on the challenge, boding well for lenders, including FGI, who have historically focused on international financing. We are able to bring our decades of experience to assist and support these customers in navigating the nuances of such cross-border transactions.
Whether born of necessity or opportunity, one thing is certain: as long as there continues to be an overabundance of capital and liquidity in the market, borrowers should take this as an opportunity to enhance their financing arrangements with creative and aggressive solutions.
This article is for informational purposes only and does not constitute professional advice. Investments always have the potential for loss. FGI, including its affiliates, makes no warranties about the accuracy or the completeness of this information and disclaims any liability (including direct, indirect or consequential loss or damage) related to the materials. Please consult your financial professional for advice relating to your circumstances and refer to our show notes and website for the full terms and conditions.