Refinancing Corporate Debt: Count More Than Just the Cost

Refinancing European companies’ debt has never been easier than it has been over the past year. As long as interest rates remain relatively low and investors are looking to put stockpiles of cash to work, it looks set to remain so. While the obvious reason to refinance is to lower the costs of servicing corporate debt, this should never be your sole consideration – even if the refinancing is by necessity rather than a discretionary opportunity. Taking this wider view of liability management can improve your company’s balance sheet in the short term, and its relationships with investors and creditors in the long term.

When you are looking to refinance you will be in one of two positions: either you will be forced to renegotiate with your banks or bondholders because your company cannot meet its current obligations, or you will be ‘prefinancing’ – restructuring your debt for a positive strategic reason long before, strictly speaking, you need to. Your debts will be, basically, composed of bank loans and bonds in varying proportions.

Refinancing by Necessity

Obviously if your company is forced to refinance your imperatives will be reducing the cost of your debt or extending its term. But, even during what is a very difficult time, it is important that you consider more than just how much interest you are paying and for how long. Although the balance of power in these situations may well rest with your creditors, these days as a debtor you have fairly wide latitude in reducing the number of or ameliorating any negative covenants attached to their debt – an opportunity you should grasp.

Further than that, you should use any refinancing as a chance to take a close look at whom you are banking with. By reviewing your entire banking business you can either reduce the complexity of your debt by dealing with fewer banks, or work with banks that have a better understanding of your business and the risks you face.

Prefinancing

There are many reasons that your company might want to refinance before you face a pressing need to. The first is, obviously, to take advantage of low interest rates. But other reasons include spreading your debt out over a longer period, especially if a recent corporate transaction has concentrated that debt, or reducing a large amount of cash on your balance sheet – cash that your investors want to see either put to use or returned to them.

If your company is refinancing at your discretion you face a broader set of questions than if you are forced into it. Just as if you were refinancing by necessity, you will want to look at your debt covenants and your banking relationships as well as your total costs. But you will have the time and flexibility to examine other issues as well. First, if you are looking to buy back bonds and you have issued different types or ones with different covenants, which make the most sense to repurchase and how will any buy back affect your capital structure? What strategy should you use to repurchase them? The options available range from discreet buying on the open market to different kinds of public tenders. Each of these has its advantages and disadvantages from timing, legal, tax and accounting standpoints.

Sometimes debt-for-debt exchanges make more sense than merely buying back your debt. Do you want to extend or shorten the maturity of your bonds? Shortening their maturity can help you eliminate debt quickly, while extending their maturity can send a message to the market that lenders have faith in your long-term prospects. Do volatile exchange rates mean that your company would do better offering debt in a different currency? Is there a different type of debt instrument that would offer you advantages over your current arrangements?

Whether buying back or exchanging debt, an important early decision is finding the right bank or banks to help you through what can be a very complex processes, with many reporting and legal details to manage. Anyone you choose to work with should have a long track record of helping other clients through similar situations.

Setting your Stake in the Stand

A vital point to remember is that refinancing is always about more than just adjusting your company’s capital structure. Whenever you actively engage in liability management it is sending specific messages to stakeholders that include not only your creditors, but your equity holders as well. It’s important that you clearly signal your intentions to these stakeholders and then follow through. By doing so, the message they receive is the one that you intend to send – that your company is well managed, trusted by creditors and focused on shareholders.

Andrew Cross is a director in Ernst & Young’s Strategic Finance Group.

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