Refinance Now

10 December 2010

With many financing agreements coming up for renewal in 2012, Mike Daniels urges the FM sector to refinance early with their lenders to avoid the effects of a possible squeeze on capital markets as the economy recovers

CONTRARY TO POPULAR BELIEF, banks are working hard to ensure there is sufficient funding in the market for facilities management companies which present a viable business proposition. Indeed, Barclays announced it provided £35bn in new lending to businesses and households in the first nine months of 2010, an increase of over 30percent versus the same period in 2009. Although businesses have been borrowing less for some time as the market has generally deleveraged, loan demand is actually expected to increase as we approach the end of the year and into 2011 with demand set to jump in 2012.
Many UK and European facilities managers will need to refinance in 2012 as a result of three, five and seven-year agreements signed in 2009, 2007 and 2005 reaching maturity. This will place demand on bank balance sheets and assuming that capital pressures persist in the market, financiers may reserve balance sheet for core client relationships and other priority transactions making the supply of liquidity more difficult to predict. Management teams, therefore, cannot afford to ignore the situation.
Spike in demand
In addition, the UK economy should begin to adjust to the effects of the Government’s Comprehensive Spending Review and the rebalance between public and private sector.
As confidence in the private sector increases, businesses will start to borrow again for capital investments, which will increase the pressure. This will potentially lead to a spike in demand and increase the cost of debt to businesses.
Those businesses with the ability to refinance early with their lenders should seriously consider doing so to avoid the squeeze and to lock in at current rates before the supply of finance available from bank deposits and from the capital markets becomes
increasingly scarce. This will also serve to provide certainty of funding over the next three to five years.
Adding additional pressure to this spike will be demand for growth finance. Businesses are currently managing for cash, but capital expenditure cannot be deferred indefinitely and at some point they will have to invest again. Smart management teams will spot opportunities created by the recession and the changes in how Government provides services. These are the businesses that will be the first to seek finance. Demand will accelerate as the economy gradually strengthens and this may also coincide with the refinancing spike as it reaches a crescendo in 2012.
Liquidity constraints
The increase in demand for liquidity is not just a feature of the lending market. Sovereigns, banks and corporates – anyone raising finance – will find themselves exposed to the same liquidity constraints. Banks raise money to lend from customer deposits and through the wholesale markets. There is increasing competition to attract customer deposits, and increasing competition in the wholesale markets for liquidity.
All of this means that the time for UK facilities management businesses to refinance is now while banks and the capital markets supply outstrips the current lower demand.
However, it is clear many Chief Financial Officers are delaying refinancing in the belief that spreads may fall before their debt matures. This belief has emerged as a result of the widening of spreads over base rate and LIBOR from their precrunch levels, leaving many businesses with the impression that lending is currently expensive in historical terms.
Cheaper option
The reality is that while margins have increased due to a rise in lending risks and regulatory change, such as banking capital requirements and the increased cost of wholesale borrowing, bank debt is still substantially cheaper in absolute terms than in 2007 or 2008 due to the historically low interestrate environment. This is unlikelyto remain the case. Refinancing early and locking into current rates may avoid the squeeze.
● Mike Daniels is Head of Business Services, Barclays Corporate