A thorough implementation of the financing strategy, with continuous attention for existing credit agreements, is more important than ever! In addition, the value of a good relationship with banks or investor(s) should not be underestimated. We explain why.
Availability of funding, normally…
Under normal market conditions, assuming a stable money and capital market and (efficient) access to a variety of funding sources, the availability of funding and the associated terms and conditions for an institution are largely determined by the strength of its financial ratios.
An important aspect in this respect is the opinion of banks (and/or the accountant) on the continuity of the institution. The continuity is reflected in particular by the degree of certainty about future operational cash flows and by the certainty of the financing cash flow.
Questions that come into play are:
- What is the cash-generating capacity?
- Are there sufficient liquidities available in the coming period?
- Are there any credit lines launching in the next 12 to 18 months?
- Are there refinancing moments within the portfolio for which preparations have yet to be started?
- Is there a sufficient buffer between the required standards of the bank covenants and the actual levels achieved or expected?
The impact of Covid-19
The Covid-19 crisis makes it clear that sound operating results from the past do not guarantee availability of liquidity in the near and distant future. This crisis exposes a risk that was not foreseen by almost anyone. A worst-case scenario, in which turnover drops to 80%, seemed surrealistic but unfortunately became reality for a large group of entrepreneurs and healthcare institutions alike. Sometimes the decline is even greater, for example for activities in the cultural sector, entertainment, hospitality or body care.
An institution can hardly hedge against a risk with an impact like that of Covid-19. The Covid-19 crisis has a global reach and is being addressed at various levels (local to global). This is apparent from all the measures that countries have taken individually, but also on a continental level. In the Netherlands, both central government and local authorities play a crucial role in combating the discontinuity in businesses and institutions. In the health care sector, a large part of the health care institutions can also rely on insurers in case of liquidity problems.
What can you do as an institution?
A historical sound development of key figures is a good basis for a successful financing application, but offers no guarantee that financing will actually be made available. A thorough multi-year budget with a qualitative analysis of the main cash flows is at least as important. The total cash flows should preferably lead to a positive development of key figures and show the financing requirement and the repayment capacity of the institution.
That qualitative analysis is important in determining the institution’s financing strategy. However, this cannot take place without also having a picture of the characteristics of the current financing arrangements and loan portfolio, and including them in the strategy.
Ultimately, the financing strategy should include the most optimal financing structure for the institution. In our opinion, it would be ideal if the financing structure should determine the selection (‘long and short list’) of the lender(s) active in the financial landscape – and not the other way around. In practice, this order is easily overlooked.
The (pre-)selection is facilitated by proactive investor relationship and management, i.e. consistent maintenance of the relationship with house bank(s) and potential financiers, within the financial landscape. This may include keeping them informed on financial developments and new strategic plans.
The benefits of active relationship management will likely be reflected in the financing of major investment programs, in terms of relative scarcity of providers and, even more so, in times of crisis.
Funding landscape in recent years
The funding landscape for public institutions has undergone a number of changes in recent decades. As a result of the financial crisis (2008 - 2011), the funding landscape changed significantly. Due to the Basel guidelines, commercial and sector banks provided less funding. The market surcharge became a structural part of the interest coupon. The financing conditions for borrowers, set by banks, became stricter and the total exposure per counterparty per bank decreased. Lenders formed a consortium with club deal contracts in order to share the counterparty risk and to be able to meet the borrower's financing needs. As a result, the choice of an institution from the financing providers was often limited. In financing processes, it was not always possible to form a second consortium of banks, which meant that there was no healthy functioning of market forces. This resulted in higher credit spreads.
The financial crisis prompted a steady search for alternatives to traditional financiers and forms of financing. Examples include the 'healthcare bond' and raising loan capital from investors using a rating. However, the number of financing processes that have been realized with the aid of a healthcare bond or rating is limited to date.
Indeed, starting in the second half of 2015, there was an easing of available funds at banks through the ECB's buy-back program. This easing resulted in wider availability of funding and a further decline in interest rates in the capital market. This decline had already started in 2008, the first year of the financial crisis.
"The credit crunch prompted a steady search for alternatives to traditional funders and forms of financing."
In addition to the money expansion through the buy-back program, the increased involvement of the European Investment Bank (EIB) was an important factor in the limited breakthrough of new initiatives. The EIB had already entered the landscape for healthcare institutions (hospitals) in 2005, mainly for 'academic hospitals' but as of 2017 it is mostly involved in financing 'top clinical hospitals', 'general hospitals' and universities.
In recent years, driven by the expansion of funding, commercial and sector banks have increasingly been able to lend bilaterally rather than in syndication, with higher principal amounts per counterparty. This, combined with the stronger presence of the EIB and, where possible a role for, for example, the Guarantee Fund for the Health Care Sector or Guarantee Fund for SMEs, has ensured an adequate funding landscape for most institutions over the past two to three years. A landscape with sufficient diversification, freedom of choice for the borrower and more attractive credit spreads than in previous years. Such a landscape has not proved a fertile breeding ground for new forms of financing.
The financing landscape after Covid-19
The impact of the current Corona crisis on the landscape for the coming period is unfortunately not yet clear. This demands improvisational skills of treasurers with a financing assignment. Banks are currently busy providing companies and institutions in acute liquidity need with bridging loans or granting them a temporary postponement of repayments and interest. A number of bank counters are only open to their own customers and some proactively communicate that applications for expansion or replacement investments are taking longer to process. A positive sign, however, is that ongoing financing processes, which Zanders is aware of, are continuing to make progress. The current crisis may be a reason to re-examine financing on the basis of a rating and/or via bonds.
Due to the uncertainty in the financing market, caused by the corona crisis, and the current demands on banks, it is advisable for treasurers to start in time with the preparations of a financing trajectory. Under the motto 'spread opportunities' it is wise to inform 'new' potential financiers in a timely and targeted manner about investment and financing plans in order to find out their appetite.