Debt financingOptions for senior debt financing

23 June 2016

Summary

Funding world

Why it is changing

What products are available

What does the borrower need to do

Outlook

Introduction

Diversification of products in the credit sphere

Borrowers looking to protect themselves by spreading funding sources

Banks under increasing regulatory and capital constraints

Entrants of new players Institutional funders Platforms

Product range

A changing world…

Range of products

LoanRevolving credit facilityTerm loan

P2P

Public bonds Rated and unrated

Private placementsRetail bonds

Sale and leasebackLeasingInventory finance

Sub heading (if required)

Bank

…providing diversity for borrowers

Bonds

Platforms

Asset finance

Range of products

Significant upturn

Net finance raised by UK businesses

Note1 [Xxx]

(3)

(2)

(1)

-

1

2

3

4

5

6

2013Q1

2013Q2

2013Q3

2013Q4

2014Q1

2014Q2

2014Q3

2014Q4

2015Q1

2015Q2

2015Q3

2015Q4

2016Q1

(£bn

)

Loans Bonds Equity Commercial paper Total¹

Range of products

Steady up-tick

Successful applications for borrowing facilities

50

60

70

80

90

100

2012 Q4 2013 Q4 2014 Q4 2015 Q4

(%)

All loans and overdrafts All overdrafts All loans

Selection criteria

Size and tenor

Flexibility Drawdown profile

Complexity

Security

Legal documentation

Key issues for borrowers

Fitting the product to your requirement…

The coming of the new shadow banks

Emergence of non-banks

Entry of private equity and asset managers, e.g. GSO, M&G Partnerships with UK banks

Non-traditional players focus on

Consumer lending Small business lending Leveraged lending

Alternative lenders

…with old and new products

The coming of the new shadow banks

Technology a key element of shifting markets

Automated credit processes and lower regulation Lower cost bases -> price loans in lower interest ranges

Different funding bases

P2P lenders intermediate between risk-taking investors and borrowers

UK government supporting P2P by removing barriers to expansion…which should benefit the customer

The products

Highly flexible Tried and tested structure and documentation

Key terms No minimum size Financial covenants required Limits on additional financial indebtedness, acquisitions /

disposals

Costs Arrangement fee Margin over BR or LIBOR

Traditional bank debt

Key lenders

Key lenders

The products

Unlisted and placed with small number of institutions Pension funds, insurance companies

Key terms Long term – 25+ years Minimum size £10m - £150m Security? Documentation similar to bank facilities – financial covenants

Costs Fixed rate coupon Early repayment penalties

Private placement

Key lenders

The products

Listed on London Stock Exchange Road showed to c30 institutions and bought by 100+

Key terms Size < £200m 5-40 years Limited financial covenants Credit rating probably required

Costs Coupon similar to private

placement Repayment penalties

Public bonds

The products

Sale and leaseback Sale of operational assets Leaseback at rate equal to financing rate on capital amount

Key considerations Suitability of assets Lease rental payments Operational impact from loss of control of assets Administration burden

Size – very small to the large Some repayment flexibility

Asset-backed finance

Hotel du Chocolat

£3.7m 2010Gross annual return 6.7% - 7.3%Redemption 3 yearsPurpose Factory expansionPayment Bi-monthly deliveries of chocolate

equal to Gross annual return

Chocolat Bonds No. 1

Chocolat Bonds No. 2£7m 2014Gross annual return 7.25%Redemption 3 yearsPurpose Development of production facilitiesPayment Bi-monthly deliveries of chocolate,

restaurant and hotel vouchers

Credit risk

Borrower presentation 3 year business plan Integrated P&L, B/S, Cashflow Liquidity forecast

Management consistency Capability and approach Reliability of forecasts vs historical outturn

Showing how the downside is protected more than the upside Realism

The common thread

Credit riskSpreads on lending to SMEs

SMEs Medium-sized (PNFCs)

2013 2014 2015 2016 4.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4 (10)

(5)

-

5

10

15

20

25

Net

per

cent

age

bala

nces

(%)

Incr

ease

Dec

reas

e

2013 2014 2015 2016 3.0

3.1

3.2

3.3

3.4

3.5

3.6

3.7 (20)

(10)

-

10

20

30

40

50

Net

per

cent

age

bala

nces

(%)

Incr

ease

Dec

reas

e

Factors in choosing product

Product structure Documentation How it works when the

downside case occurs

Local office vs regional For how long will lender be

around?

Actual fees and margin vs Operational impact on the

business

Amendments Early repayment Matching business needs

Complexity

Price

Availability

Flexibility

Conclusion

Trend away from banks continuing

Banks recognising need to offer the right service

Good for borrowers who are credit focused