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Lending options: an essential New Year’s resolution

Stuart Preston Stuart Preston

As 2021 brings an end to the various government support schemes offered to combat COVID-19, reviewing your lending options will become essential. Stuart Preston considers what your New Year's resolutions should be.

As we come to the end of 2020, business leaders in the north east’s oil and gas industry are breathing a collective sigh of relief on news of the COVID-19 vaccines. Oil prices rose around 8% globally following the news.

In the short term, however, supply still exceeds demand, particularly across oilfield services. A number of players in this market are at the tail end of contracts finishing during the first half of 2021, with a restricted (in some cases non-existent) pipeline thereafter.

Furthermore, 2021 will likely see the end of lending options like the Coronavirus Job Retention Scheme. This will come before oil demand has had a chance to substantially increase.

An end to government support

Government loans have been welcome and, undoubtedly, prevented many insolvencies, but those schemes close in January. Businesses that took out a facility over the past year will need to start repayments, in addition to settling any deferred tax bills.

HMRC has been agile and accommodating, but that too may change. As of 1 December, it regains its status as a preferential creditor during insolvency proceedings. That will affect traditional lenders' appetite to risk, with outstanding tax liabilities priced in.

For many, there is a sense that the can has been kicked as far down the road as possible; and the new year will inevitably bring cash pressures.

Existing lending options reach capacity

During 2020, companies that have required funding, or a little more flexibility, have been advised to approach existing lenders. And this is likely to remain a sensible starting point for any funding need, particularly given the need for new lenders to undertake detailed diligence in a volatile market - better the devil you know in most cases.

However, in some cases, existing lending options may not have the capacity to further extend credit lines, prompting corporates to consider alternative sources of funding.

While banks remain vital lenders to the UK mid-market, alternative sources should not be ruled out, including:

Debt funds

This can provide facilities with higher levels of leverage, greater flexibility on amortisation profiles, more headroom on financial covenants, and higher individual ticket sizes. Such facilities will likely come at a higher cost.

ABL facilities

Asset-based lending facilities extend beyond the traditional invoice finance. It is possible to add in other assets to create a much-larger borrowing base, generating higher leverage than cash flow-based lending.

Private equity

For its part, private equity is well suited to support growth and exit ambitions of management teams during what is likely to be a year of consolidation and change in the energy supply chains.

Taking stock of lending options

There are numerous funding routes for CFOs to explore. Taking stock of all of the options will be critical to the survival of some businesses, and the growth of many more, during 2021.

To discuss how we can support you with lending options, get in touch with Stuart Preston.

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