Case study: Debt raise for a service company

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A fast growing service company contacted us to help them with the financing of their working capital needs. The company had a very successful strategy and market position, however, despite strong financial results and significant profitability increases, its development was constrained by the lack of funding.
Due to the lack of physical assets with which to secure traditional loans and the general situation in the banking sector it could not access traditional bank finance.

After a series of discussions with the management we presented them with the alternatives available in the market.

For reasons of cost and dilution, the existing shareholders were unwilling to consider a private equity investor and therefore we concentrated our efforts on the debt financing alternatives.

The three most suitable alternatives were a private placement of bonds, a “unitrance” loan facility from credit funds and mezzanine debt financing.

A private placement of bonds involves a company issuing high yield commercial paper or bonds and offering them to private investors, which include insurance companies, pension funds, wealthy individuals and other corporates.

“Unitranche” means that a credit fund refinances all the existing debt and provides additional debt to the company in effect becoming the only lender. This means that in the case of a default the lender controls the recovery process and can maximise the recovery of its funds.

The mezzanine debt is an unsecured loan facility which is subordinated to existing debt, hence the name mezzanine (neither debt nor equity, but something in between).

Although the alternative sources of financing are typically more expensive than senior bank loans in terms of interest rates the advantage is that the repayment can be structured in a way which allows for growth (the principal is not repaid until maturity). In addition part or all of the interest can be accrued to the principal and also paid at the end of the financing (e.g. PIK interest, back ended interest and principal payment).

After the decision of the management to run with all three options in parallel we set out to check the client’s financial projections and business plan. It soon became apparent that the client’s financial projections would not meet the standards of international investors therefore we undertook a comprehensive financial modelling exercise with sufficient detail and explanations to satisfy international investors. The thought process behind the creation of the financial model also helped the management of our client to exactly quantify the amount of financing needed to support their business plan.

After this stage we helped with the preparation of all the necessary documents such as a short description of the financing opportunity, information memorandum and non-disclosure agreements.

We supported the client throughout the engagement, contacted potential investors, oversaw the work of other advisors (legal, tax, due diligence) and evaluated the financing options. The project was successfully completed through a mezzanine financing facility on terms appropriate for the business needs of the client.