Debt raising as a strategic growth enabler | KPMG | AU

Debt raising as a strategic growth enabler

Debt raising as a strategic growth enabler

The attitude to independent debt advisory is shifting, according to KPMG’s 2017 Evolving Deals Landscape survey respondents. Australian companies are realising the importance of having a well-informed and professional debt raising strategy in place prior to approaching financiers.

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The Australian independent debt advisory market is still not considered a pre-requisite to approaching financiers, with many companies content to pursue debt financing without external advice. That makes it somewhat surprising that 40 percent of respondents to the 2017 Evolving Deals Landscape survey said they would seek external help with their merger and acquisition (M&A) debt financing.

This result points to a growing appreciation of the advantages that independent debt advisory can bring to the negotiating table. These include market knowledge of pricing and terms, experience and expertise in managing the most efficient and effective processes, increased commercial acumen and extensive support in managing more complex financing relationships.

Conrad Hall, Director in KPMG Australia’s Debt Advisory Services, says that companies seek outsourced debt advice to add value to their processes. “Financiers, sellers and buyers all take the extra level of due diligence we add at KPMG very seriously. It’s that extra layer of knowledge around what the market is doing and looking for. When we’re involved, the financier takes comfort that the deal is well structured and sustainable, based on sensible metrics, is well presented and supported by quality information. We are truly independent, with a deep understanding of all alternative solutions and are not merely pushing our own product.” Another advantage of outsourcing, says Hall, is the access it gives to an advisory firm’s experienced and flexible resource pool.

Debt financing for a variety of strategic goals

Scott Mesley, Head of Debt Advisory for KPMG Australia, says the current climate is the most balanced it has been for the past 15 years. “It’s probably the best mix between the negotiating strength of the borrower and lender or capital markets we’ve seen for a long while.”

Yet despite these favourable market conditions, just 18 percent of the survey respondents are planning to take advantage of them within the next 3 years. Mesley puts this down to the M&A cycle in part. However, he says it also reflects concerns that banks may seek to increase their debt margins. “I think a lot of CFOs have raised debt already and have headroom in their facilities. They know that their debt facility may not be cheaper in the near future.”

Companies that are planning to raise debt indicate a number of reasons for doing so. They include: funding M&A (40 percent), organic growth (44 percent) and refinancing existing debt facilities (44 percent).

Broken down by sector, Technology, Media and Telecommunications (TMT) companies are intending to fund M&A for the most part (63 percent) as are those in the Health sector (60 percent) and ENR (56 percent).

However, more than half of the Financial Services sector (58 percent) is interested in funding organic growth, principally due to the innovation and disruption occurring in that sector which is requiring new and more complex forms of capital structuring. Of the Consumer & Retail sector, 60 percent are intent on raising debt to refinance maturing debt.

Banking on the Big 4 or alternative lenders?

When it comes to where companies are looking to raise debt, the survey shows that 24 percent will not be going to the Big 4 Australian banks. The ENR sector leads the way with 78 percent intent on tapping foreign banks for the large sums they need.

“What we’ve seen post the Global Financial Crisis is the rise of alternative finance options. Whether it’s through superannuation funds, life insurance, money out of the United States or other alternative markets, things are becoming more competitive,” Hall says.

He points out that there are a lot of pros and cons to weigh up when deciding on a financier. “Alternative financiers look for different things in a relationship. They don’t have a need for transactional banking or cross-sell like the Big 4, but they do typically require far greater due diligence since they are prepared to fund for longer durations, with protections for early repayment, for example.”

Mesley cautions that companies have to be very aware of the documentation or structure of different facilities and how they interplay with other financing structures. “You also have to examine the long-term perspective – what proof do you have that they will be around in 2 or 5 years when you want a change in facilities or need consent for a change?”

He adds that the relationship is often an undervalued player in the choice of financier. “Australian corporates are very relationship focused, with both the lenders and individuals they deal with.”

Pros and cons of debt financing

Of the companies planning to access debt, 42 percent view structural issues as one of the most prohibitive aspects of debt financing. Meanwhile, nearly half of the survey respondents (49 percent) are daunted by the cost of debt and this figure jumps to 86 percent among the survey’s c-suite participants.

Hall points out a disconnect. “There is a perception that the cost of debt is high, but the historical truth is that it is currently low. In fact, there’s no precedent in my 23 years of banking where the cost of debt on an all-in basis to be sub-4 percent.”

Across the board, respondents said the most positive aspects of debt funding were certainty of debt options (16 percent), sources of debt (20 percent) and availability of funds (22 percent). Hall adds that there are some good dynamics in play for those who do want to raise debt. “In terms of both pricing and access, it’s a good environment for a borrower who’s willing to take advice on approaching financiers with the right capital structure and a transaction that makes sense.”

The tenor of available finance options was also irrelevant for many respondents. Just 16 percent considered it to be prohibitive, according to the survey.

Hall points out that banks typically prefer 3 and 5 years when it comes to tenor. “They only consider longer for selected sectors and borrowers. Infrastructure assets, in particular, tend to attract longer-term financing. But the real challenge is that longer tenors are very problematic with the current regulatory capital requirements, which are only expected to get worse for regulated financiers.”

The Financial Services sector

However, the Financial Services sector differs considerably in its outlook. While structural restrictions are just as much of an issue for these companies (33 percent), according to the survey, a sizeable proportion (42 percent) consider tenor to be one of the most prohibitive aspects of debt financing.

Raj Bhat, KPMG Debt Advisory’s lead in the Financial Services sector, puts the focus on structure and tenor down to the recent changes by the Australian Prudential Regulation Authority’s (APRA) Prudential Standard APS 120 and its implications for the Financial Services sector – specifically for those participants accessing bank-funded warehousing facilities to fund their portfolio.

He notes that the changes to APS 120, which will take effect from 1 January 2018, are likely to increase the cost of funding and/or create a funding gap for participants where banks are no longer able to fund at current levels. With longer tenor funding now likely to attract materially higher regulatory capital for banks providing warehousing facilities, it may well be that tenor will continue to evade market participants.

Adds Raj, “This issue is affecting the banking system as a whole, whether that’s because of the pricing premium for longer tenor corporate bank debt or because of the securitisation warehouse facilities provided to non-bank mortgage and consumer finance lenders. As a result more non-bank lenders are coming into the market to fill the gap”.

KPMG’s Debt Advisory team can assist with every aspect of the debt funding lifecycle, from strategy and capital structuring to understanding the sources of finance, achieving the best terms and ongoing stakeholder management.

215, Australian Financial Services Licence No.246901 is an affiliate of KPMG Financial Advisory Services (Australia) Pty Ltd ABN 43 007 363. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).

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