Back to Basics

Not all private companies have had a tough time accessing financing through this recessionary year. In fact, contrary to popular perception, the majority of private companies in Canada surveyed for PwC's 2009 Business Insights® report said they have not noticed any significant changes over the past year when it comes to accessing capital.

So why the disconnect? Canadian private companies tended to be conservatively financed and were not the primary recipients of high leverage financings that were typical during the last M&A boom. In other words, companies with solid balance sheets, strong business plans and proven track records were not the ones keeping the lenders up at night. And while interest rate spreads on new loans have increased significantly over the past year, the increase has generally been offset by a 2.5% decrease in the prime rate and a similar decrease in Banker Acceptance rates, which are the basis for many business loans. The net result is a minimal impact to the effective interest rate paid by the private company respondents with solid balance sheets.

"What we have seen and continue to see is a 'back to basics' shift in lending practices," says Eric Castonguay, a Managing Director with PwC Corporate Finance that is focused on raising capital. "I would look at the period from 2003 to 2007 as an abnormality in terms of the ease of borrowing money, the low interest rate spreads and the minimal covenants required by lenders. In 2008, the much discussed global credit crisis created difficulties for companies both large and small seeking to access capital. In recent months, we have seen a continued thawing of the credit freeze, with many lenders exhibiting an increased appetite for new business. While activity has increased, lenders are taking a cautious approach to new accounts and we have seen a return to more conservative and traditional deal structures:"

• Leverage ratios have decreased with senior cash flow lenders generally being comfortable with debt levels of 2.5 to 3.0x EBITDA compared to pre-crisis levels of up to 5.0x or more
• Total debt service has become more onerous with fewer 'bullet' loans and an increased prevalence of straight line amortization and shorter amortization periods
• Senior debt spreads have increased from pre-crisis levels by approximately 100bp to 200bps on average and standby fees on undrawn facilities have increased
• Financial covenants tend to be more comprehensive with less 'headroom' as lenders attempt to manage risk
• Fully underwritten syndications are less common with many syndicated transactions being completed on a best efforts basis
• A return to a more traditional banking model where banks hold loans as opposed to selling down their positions, which has resulted in an increased focus by lenders on capital allocation, sector exposure and diversification

At the same time, private companies are doing more with less. The realities of the current lending environment are forcing them to be more efficient with their capital, managing their balance sheets more effectively and taking a second look at their business plans with a critical eye when it comes to new investments and discretionary expenses.

Here are some key strategies to help put your business in a position to make the most of new opportunities in these volatile times:

• Put together a solid business plan with a clear strategy and financial projections you can share with your banker or capital provider to sell your story and get the capital you need to take advantage of opportunities. "As the economy improves there are always opportunities. Having a first mover advantage is important, but to do that, you need to get the trust and support of your finance providers," says Castonguay.
• For well capitalized companies that have managed their costs through the downturn, this is the ideal time to consider merger and acquisition prospects - but only if they align with your business plan.
• Have a good handle on cash flow. "During the days of easy credit and a robust economy, tough decisions regarding your long term strategic vision could often be avoided or postponed. If you haven't already, this is the time to actively manage your business, know your costs, question the business lines you're in and what your value proposition is to your customers," says Castonguay. "It may be time to look at your businesses from a different perspective and perhaps make decisions that are painful now, but will serve your company well in the longer term."

Companies that have rolled up their sleeves, made the necessary tough choices, implemented changes to become more efficient over the past year and managed to get this far without crumbling under the pressure, can find comfort in knowing that their perseverance will be rewarded. "The credibility you gain from managing through a downturn positions you well to get support from your financiers on the upturn because while the credit markets are improving and becoming more liquid, there's still a conservatism amongst lenders who will pursue only the best of opportunities and particularly those with proven track records," says Castonguay.

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