24 March 2011
This section can be summarised by one question: how do companies get finance when bank lending remains stagnant?
After the credit crunch rocked the money markets in 2008 traditional forms of financing became scarce. Despite net bank lending to businesses rising by £4.4bn in January 2011 - after a massive £34bn drop the month before - it remains well short of pre-recession levels. Companies previously reliant on bank debt have had to look elsewhere. And as the three general counsel in this section show, companies and their legal teams have had to become increasingly imaginative when it comes to refinancing debt and funding acquisitions.
Although there was a slight upturn in the volume and value of UK M&A activity in the second half of 2010, it was only a small rise. The year to 12 December saw a total of 3,488 deals with some UK involvement, with a total value of $308.9bn (£197.84bn). In terms of volume - the measure viewed as more relevant when examining the rate of recovery for the M&A market - the year-on-year rise was only 2.6 per cent. Yet compared with 2008, that is a two-year fall of 21 per cent. Before the economic crisis the three companies profiled here - Aegis Group, Liberty Global and Porterbrook Leasing - were all aggressive in the M&A space, and while all saw a slump in acquisitions in 2009 they have since managed to step up their activities. Each has achieved this through different means.
Bonds’ new mission
One solution has been the high-yield bond market, which has seen sustained growth since the latter part of 2009. One of the most prominent examples is media outfit Liberty Global. While bank lending has dried up, the company’s appetite for acquisitions
certainly has not. Liberty first made headlines towards the end of 2009 with its e3.5bn (£3.01bn) acquisition of German cable company Unitymedia, a deal that involved high-yield financing.
Liberty returned to the high-yield bond market again last year with an innovative e500m issuance via a special purpose vehicle used to refinance its debt, a deal in which legal chief Jeremy Evans played a leading role.
Marketing giant Aegis may have seen its acquisition activity curtailed when the financial crisis first hit, but by the end of 2009 it was eager to re-enter the market. Its solution came through a combination of convertible bonds and a private placement in the US. This allowed Aegis to repay its short-term debt borrowings and extend its debt maturity, but more importantly it also allowed the company to build up a war chest to pursue acquisitions. It went on to acquire Australian marketing company Michael Communications for A$363m (£226.4m).
Rolling stock company (Rosco) Porterbrook raised more than £500m last year with two capital market bonds, allowing it to see through a highly complex refinancing. Legal head Stephen McGurk describes how the bonds were used to refinance debt from the company’s takeover, which came six months after the crash of Lehman Brothers. When the bonds were eventually launched, it effectively reopened the sterling bond market which had stalled following the sovereign debt crisis.
The deal was pioneering in that Porterbrook was the first UK Rocso to go to the capital markets to refinance acquisition debt. Its two rivals have since followed its lead. Like Liberty and Aegis, Porterbrook used the facility to finance an acquisition, in this case purchasing £54m of rolling stock from train operator Southern.
While bank lending is predicted to increase in the coming months, most commentators now believe the financial structures discussed in the next few pages are to stay. The challenge for in-house lawyers is to get to grips quickly with the challenges of the new landscape.