Debt Capital Markets
10 points about DCM markets for CFOs by Marie-Claire Ouziel, Head of DCM Bonds and Reinhard Haas, Head of DCM Loans.
Marie-Claire Ouziel, Head of DCM Bonds
Reinhard Haas, Head of DCM Loans
From our extensive time in debt capital markets, we’ve come across plenty of myths and misconceptions about corporate funding. But equally there are certain golden rules that hold true for almost every issuer, whatever their size or profile. Here we’ve gathered 10 universal points that we hope will help guide any finance director looking to raise funding via DCM loans or bonds.
1. A good credit story is as critical to your funding costs as your credit metrics
Finance directors often focus on ensuring they have good credit metrics. But they spend far less time on the story they have to tell. However, when one loan is cheaper than another with a comparable credit rating, it's very often because one company has come up with a better, more credible credit story.
In order to secure the best possible pricing and market liquidity for your deal, you can never emphasise enough why you are doing a particular transaction. If it’s an acquisition, for example, you have to underscore the ideal fit of your acquired company and why it is going to put your company in a better position — bearing in mind that investors see a lot of failed M&A stories.
2. Match the bank to the character of your issue
Navigating the European bonds and loans market takes an experienced banking partner with a proven track record. While it can be tempting to use a newcomer offering aggressive terms, there is the possibility that this could affect your future funding capability — should that transaction fail in the market.
Equally, it’s important to look for a bank that is a good fit with your size of business. If you’re a mid-cap, look for those banking partners for whom financing medium-sized companies is genuinely a cornerstone of their proposition.
3. The more transparent you are, the better your pricing will be
For both loans and bonds, financial disclosure is key to competitive pricing. Transparency can be a challenge for privately-owned businesses. However, companies that have accounting systems set up to deliver quarterly reporting are in a far better negotiating position than those who don’t.
Credible projections — both on your deleveraging capacity and your future cash generation — will also give you a pricing advantage. As to a public credit rating, this will benchmark you against other rated companies, and a good rating can deliver substantial pricing upside in the bonds market. However, in the loans market where each bank will do its own appraisal, the need for a credit rating is less pressing except for companies with a very large proportion of debt.
4. There’s no such thing as the wrong credit — just the right funding structure
Even for companies in single-B credit territory or facing a transformational phase or an unstable operating environment, it is still possible to structure a debt transaction to meet their needs with instruments of either bond or loan character, depending on their clients’ needs. In such cases, this will require a decisively bespoke structure that reflects the ability of a company to service its debt — often shorter term, with more restrictive covenants, perhaps introducing security or other characteristics of a leveraged finance deal.
With plenty of discussion and goodwill from both sides, there is almost always a way to find a debt financed solution also for more challenging credit ratings and get those deals in front of interested investors or syndicates. But it takes the right bank that is active and successful in the sub-investment grade market to make it happen.
5. Good investor relations are as important for bonds as equities
Companies tend to be very engaged with their shareholders and their lending banks but rarely have the same relationship with their debt investors — which is curious, given that the proportion of debt on a company’s balance sheet is often equal to greater than its equity. If you are a frequent issuer, in a transformational stage of your business or facing certain challenges, it’s essential to keep a dialogue going with your bond investors. Visit bond investors, keep them informed and they will be more receptive next time you need to approach them for funding or if adverse conditions arise. Equally by allowing your bond investors to act as a mirror to your company, you can get fresh insight into how your business is perceived.
6. Strategy is great but sometimes tactics are more important
We see a lot of companies who strategise on when they are going to issue debt, what they are going to issue, and how they are going to issue, which is fine. But in highly volatile markets, it can be more important to be tactical and take opportunities as and when they arise, rather than trying to time the lowest point in the interest-rate or credit cycle. It may mean paying more on your transaction — but it also means your company gets the funding it needs when it needs it.
7. The big benefit of a loan over bonds is flexibility
Lots of discussion is spent on the pros and cons of taking out a loan versus a bond. But alongside the issue of the scale of funding required and for how long, another differentiator is how much flexibility you are likely to need over the term of the deal.
A bond will tend to keep the same terms over its whole lifetime, which has its own advantages. Refinancing is possible but it can be costly. On a loan, conversely, any change to requirements can be easily incorporated whenever required — whether it’s a longer tenure or early redemption, more volume to fund a new opportunity, or a change in your business (positive or negative) that isn’t yet reflected in the documentation. View a DCM loan as a living thing: it's not a done deal and — with the right banking relationship — you can keep adapting it to your needs.
8. Never look at your funding instruments in isolation
DCM products each tend to have certain characteristics; the loan market is traditionally for three to five year lending with certain flexibilities and renegotiation abilities in its terms and structures. The bond market usually appeals to people who want large-scale financing of five to 10 years or more. But these different characteristics are highly complementary and in that sense these instruments cross-support each other.
The most effective solution emerges when a company’s financing arrangements are viewed as a whole (including not only DCM bonds and loans but also bilateral loans, hybrids and equity) and each is properly matched against maturity requirements, forecast cashflows and the implications for the business’s leverage and credit rating.
Bear in mind that every new transaction represents some form of trade-off for your business — be it a bond that increases your leverage and therefore puts pressure on your cashflow and credit rating, an equity that dilutes control of the business or a bank loan that reduces your access to emergency funding. By viewing your financing as a whole, you are far more likely to balance these trade-offs in a fair equilibrium, likewise if you look at it globally rather than in regional silos.
9. A financing bank also needs to be a relationship bank
There are regular reports in the media about the challenge posed by new online financial models to conventional banks. While such ‘challenger’ propositions may be competitive on price they also need to be able to compete in terms of relationships and servicing too. A financing partner can’t just be there to execute a transaction. They need to be ready to respond constructively when cashflow challenges arise or market conditions take a turn for the worse. Ninety percent of syndicated corporate loan volume, for example, comprises revolving credit facilities, where corporates are constantly reviewing and adjusting their lending needs. Any new financing model that’s only seeking out simple term loans will struggle to achieve scale in this market.
Corporate financing is, in most cases, an open-ended commitment. Banks that are willing and able to keep honouring that commitment in all market conditions will, in our view, continue to survive and thrive.
10. Seek out a multitude of views
It can be tempting to narrow down your source of advice on a DCM transaction to just a very small number of major banks under the rationale that they must know the market best. But if you appoint a group of lead managers, it's also very helpful to hear what their syndicates have to say. A diversity of views can often help identify a better solution and even uncover an aspect that could move the transaction positively in a different direction.
If a lead arranger seems more intent on getting a deal closed than getting it right, this raises a question. As a paying client you should always feel in control of the process rather than managed by it.