PracticeConsultingCompanies rush to secure future lending

Companies rush to secure future lending

Businesses with years left to run on their existing credit lines are now securing extensions in a climate where an absence of credit could provoke ‘going concern’ warnings from auditors, according to Deloitte's debt advisory team

Companies are scrambling to lock down lending facilities years in advance of
needing them as more than $9trn (£5.47m) of loans will be called in between 2010
and 2013.

According to analysis by Deloitte’s debt advisory team, businesses with years
left to run on their existing credit lines are now securing extensions, so
called forward start facilities (FSF), in a climate where an absence of credit
could provoke ‘going concern’ warnings from auditors.

As the financial storm worsened, big name companies moved to secure solid
lines of credit. Publishing giant Reed Elsevier agreed a $2bn facility, while
the pubs group Marston’s also signed a forward start deal this year. Bookmaker
William Hill and energy giant International Power have also been linked with
similar moves.

But can renewed credit lines be enough to keep the insolvency wolf from the
door? Nick Hood, of insolvency specialists Begbies Traynor, warned that the
agreements were subject to conditions, and the banks could pull the facilities
if companies fell into serious financial trouble.

‘For sure, the bank’s willingness to agree to this is a good sign of
confidence and support.

But at the end of the day, almost all credit facilities are either on demand
or have default trigger events built into the small print, so nothing is ever
really guaranteed – if things begin to go badly for the company, there’s always
a risk that the bank will take back its umbrella just as the rain starts.’

There has been much controversy surrounding credit and how auditors deal with
it. At the end of last year the Financial Reporting Council attempting to quell
fears by publishing guidance which said that the absence of a renewed banking
facility was not a cause for a going concern warning.

But it has become common knowledge that auditors are grilling clients about
credit arrangements, despite the regulator’s advice.

Earlier this year, Andrew Ratcliffe, senior audit partner at PwC, told
Accountancy Age: ‘There have been longer and more difficult
conversations between auditors and management than for some time.’

Fenton Burgin, debt advisory partner at Deloitte, said: ‘FSFs provide a
certainty of funding, placing a ceiling on pricing, and crucially in today’s
environment, allowing a company to determine its medium-term funding gap.’

The deals come at a price, however. In return for the commitment under the
FSF, lenders receive a fee which is payable until the FSF is funded. These fees
are in addition to the margin agreed on the FSF. The new facility only kicks in
if the old debt is repaid.

Companies will have to weigh up the extra cost against the security of having
their facilities guaranteed at a time when cash is tight and auditors are being
more demanding.

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