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Capital Thinking: finance and treasury management

With debt financing, the post-deal period often brings additional challenges for CFOs and finance teams, including administration of the debt and managing the tax implications. Our debt advisory team works with Dakota Advisory to provide insight and guidance on managing these requirements.

The ongoing administration and compliance requirements involved with taking on new debt facilities can be significant. Many borrowers and issuers struggle with the time and resource required to fulfil these.

For example, management’s time is often taken up by the day-to-day running of the business and smaller issuers may not have a dedicated treasury function that can commit to these ongoing requirements. Or a business may be carved out from an international group in a sale process which excludes the treasury support it once had. Private equity-owned portfolio companies may find themselves with a new and unfamiliar type of financing arrangement, with insufficient or untrained resource.

We see this type of situation often where a borrower may move from a single bilateral bank facility to a more complex capital structure. These can involve multiple lenders and different layers of debt. This could be the result of a large acquisition or a move to private equity ownership.

In addition, the legal documentation for a debt facility can be long and complex. The terms and concepts therein are not necessarily immediately familiar to management in industries outside finance, so additional support may be required.

Issues that borrowers must manage post closing include debt administration and compliance, as well as consideration of the tax implications of any finance and treasury arrangements. 

Debt administration and compliance

Borrowers need to understand the practicalities of key terms and obligations, such as the ongoing reporting requirements of the debt facilities, including covenant compliance and delivery of management information, together with the corresponding timeframes.

Building robust daily treasury processes is essential, but something that many borrowers don't have in place. Examples include building models for day-to-day administration, for example, compliance with covenant ratios, calculating available headroom, internal compliance, basket models, and a diary of reporting requirements.

This is not always as straightforward as it might seem, especially if there are multiple obligors or a complicated intercompany loan framework. Without careful management and reporting, internal cash management issues can arise, potentially leading to substantial costs.

Once the appropriate models are in place these can streamline the process and be then used on an ongoing basis by management.

It's also necessary to have accurate cash flow forecasting to monitor ongoing liquidity requirements after the debt facility negotiation has closed.

Careful management of foreign exchange and interest rate exposure is also vital. The former is particularly the case where new multi-currency facilities have been entered into, while agreements with variable interest rates bring the attendant risks from interest rate changes. Solutions range from monitoring exposure, to advice on implementing hedging strategies and even reducing FX risk with careful debt by currency decisions.

Managing the tax implications of finance and treasury arrangements

Borrowers must agree an ‘arms length’ margin for interest on intercompany loans, which is particularly important when dealing with cross border debts.

Exposure to any foreign exchange rate movements needs to be managed as fluctuations could have a material impact on the company’s profits. Consideration should be given to the deductibility of interest in the UK and overseas to maximise the amount of tax relief available. It is important to look at the cash flow implications and administrative burden of dealing with withholding tax compliance and reporting obligations.

Borrowers may need to develop strategies to manage and eliminate trapped cash in the structure and reduce the associated costs this creates.

We can provide issuers with support in managing their finance and treasury arrangements, to ensure that after the deal closes the right processes are put in place to enable management to meet all reporting and compliance requirements for the duration of the debt facility.

Our experts can help businesses at all stages of the financing transaction, including post-transaction. We provide treasury services in collaboration with Dakota Advisory who specialise in proving in-house treasury resource for transactions or on an interim/longer term basis.

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