Posted: 15 Dec. 2020 05 min. read

Understanding debt and capital markets pre and post COVID-19

A guide for CFOs and treasury teams

For private and smaller ASX listed companies, accessing capital can be a challenge at any time but the COVID-19 pandemic has also imposed liquidity and funding constraints on some borrowers, which in turn has put a spotlight on companies from their auditors.

The focus for most CFOs and treasury teams should now be pre-empting board talk or concerns on their own capital management plans and whether there is a need to reset and resize the company’s capital mix and borrowing platform.

Increasingly CFOs and treasury teams are engaging an independent debt advisor, rather than just relying on insights and ideas from their existing lender. Considering debt and capital diversification options provides clear objectivity to board discussions on the what, when and why of debt and capital markets options open and available to them.

The global and local debt and capital markets chart below gives you an idea of the typical risks versus returns required by the bank and non-bank lenders across the various debt and capital markets for private and public companies. 

 

The benefits of taking a deep dive

Having an understanding of the funding required now or in the future to finance a debt refinancing, capex, equipment, debtors, inventory, acquisitions or off-balance sheet working capital can give CFOs and treasury teams a vital deep dive analysis and edge when being called upon by the CEO or individual board members.

With an independently prepared external report, CFOs and treasury teams have an ’extra voice’ when presenting capital management plans to the board or to their auditors. 

A detailed understanding of the various credit metrics requirements, peer scenario analysis, and key funding markets and lenders as well as the key characteristics can provide companies the rigor required to create the foundations for establishing the right debt and capital mix.

 

Key themes borrowers are seeing from lenders

After an initial wave of borrower triaging by lenders, CFOs and treasury teams are witnessing first-hand that existing lenders are turning their attention to a borrower’s credit metrics, facility structure, funding and liquidity diversification and pricing. The key themes we have seen firsthand during pre and post COVID period include:

  • New debt funding requests are taking longer with an emphasis on gearing levels, cash flow certainties and terms.
  • Financial covenant breaches means short-term waivers; a longer-term holiday; or an absolute uplift.
  • Credit rationing environment exists across corporate, infrastructure, property and government sectors.
  • Lenders final hold commitment levels are being lowered.
  • Pricing (senior debt) is going up. Tenors are limited to three-years bullet or five years amortising depending on cash flow certainties.
  • Lenders want more onerous terms and conditions or extra collateral/security/strong unpinned cashflows.
  • Non-banks funding diversification is key for clients with the aim of accessing a mix of alternative debt lenders, new banks or new funding markets.
  • Credit ratings open up far deeper and more liquid markets and will assist in driving pricing down for bank lenders.
  • The COVID-19 liquidity and funding constraints on projects and balance sheets have also put a spotlight on clients from auditors.
  • More boards looking to robust capital management plans and options – equity vs hybrids vs mezzanine debt vs senior debt stacks.

Companies are acknowledging that maintaining strong relationships with existing capital providers is crucial as well as pursuing other traditional credit providers with the need to consider alternative funding and liquidity and market sources.

Increasingly, we’re seeing CFOs and treasury teams engaging independent debt advisory firms to do an analysis and create a thorough contingency plan on potential debt and capital funding and liquidity alternatives and the value of these reports to boards and shareholders and auditors are proving invaluable.

More about the author

Paul Bartlett

Paul Bartlett

Partner, Financial Advisory

Paul is a Partner in Financial Advisory and leads the independent debt advisory practice. The team’s focus is on providing local and global debt financing solutions in regards to debt refinancing, acquisition funding and other forms of capital initiatives to both private and public clients. Paul has more than 30 years of experience in banking, capital markets, advisory and treasury payments, including expertise in global markets, investment banking, corporate finance, private equity, M&A and treasury and risk management practices. Paul has worked with many major local and global banking and advisory firms in the U.S, Asia and Australia, and has built an enviable reputation with Board Directors and Senior Management from a wide range of companies and debt investors. Paul’s extensive strategic expertise and track record provides value for all types of clients in a wide range of industry sectors who are seeking a trusted debt adviser to assist with optimising the structure of their debt financing.