Alternative sources of debt financing

Monard-D’Hulst

Bram Delmotte

27 November 2014

Overview• Credit crisis?• Criteria for financial structure• Bonds

– Retail bonds– Private placements– Mini-bonds– Miscellaneous

• Alternative bank financing• Alternative non-bank financing

– Opportunities for Shadow Banking– Legal points of attention

1. Credit crisis?

• Banks reduce balance sheets, including supply of loans, but less demand due to the

economic crisis

• Interest rates have never been so low but banks demand more credit conditions

(security interests, covenants, formal conditions)

• Especially difficult to obtain:

– loans with higher risk or where risk is more difficult to measure (e.g. PMEs –

rating!)

– long term loans (> 5 years) and project finance

• Belgian banks may be back in business but foreign banks have withdrawn (from

bilateral loans but also from syndicated loans)

• See strategy of banks: only lend if they can also do other business, especially M&A

• Need for alternative financing

2. Criteria for financial structure (1)

• What kind of financing depends on what kind of borrower you are:

– Risk profile

• Creditworthiness (solvency, liquidity, profitability, cash flow, security interests)

• Reliability

• Future

– Sector

– Size

– Growth path (from FFF to IPO)

2. Criteria for financial structure (2)

• … and many other factors:

– Duration of debt

• E.g. real estate company with LT leases: equivalent debt duration

– Cost

• Cost of duration and other conditions

• Normally extra cost for illiquid debt instruments

– Diversification

• Maintain competition between banks

• Financial markets versus banks

– Timing

• Financial markets windows

• Markets may close when financing matures (you may increase volume of unused lines, etc.)

– Spread of tenors

– Flexibility: revolving versus drawn, anticipated cancellation

3. Bonds (1)

3.1. Retail bonds

• E.g. WDP, La Lorraine Bakery Group, VPG, Pinguin, DEME,…

• Very successful

• Towards an American way of financing

• Investment grade bonds vs. high yield bonds: covenants

3. Bonds (2)

Subordinated structure All-bond structure Pari-passu structure

SeniorBankTermDebt

(High Yield)Bond

SeniorRCF

SeniorRCF

(High Yield)Bond

SeniorRCF

(High Yield)Bond

SeniorSecuredRanking

“Super Senior”Secured orUnsecuredRanking

Senior Securedor UnsecuredRanking (ordual trancheSenior Securedand SeniorUnsecured)

SeniorBank TermDebt

SecuredorUnsecu-redPari-PassuRanking

3. Bonds (3)

3.2 Private placements

• Prospectus not required by law

– Changes in prospectus law, a.o.:

• Exemption if offering to employees/directors

• Short prospectus if issuer is an SME,…

• E.g. Ontex, Montea, Ghelamco, Studio 100, Vemedia Pharma, Sarens,…

• E.g. a wide range of alternative financings:

• Promotor (residential property)

• Farmer (agriculture)

• Construction companies (‘huurfonds’)

• Consultants in some sectors are setting up ‘funds’ together with construction companies

• Investors:

– In Belgium: often only high net worth individuals

– In US: only institutional investors (insurers), e.g. Univeg, Befimmo

3. Bonds (4)

3.3. Mini-bonds

• E.g. Terra², De Cronos Groep

• No bank involved

• All over Europe:

– German stock exchanges: “Bondm” (Mittelstand bonds)

– UK: “mini bonds”: chocolat bonds, non-transferable bonds, etc.

– Euronext Paris: issue amounts lower than 2 mio€(!)

– Euronext Brussels: “there are brokers that want to do it as from 5 mio€”(!)

• Liquidity issue?

3. Bonds (5)

3.4. Miscellaneous

• Various types of bond issues:

– Innovative ‘private placements’ (eg DKK, Vulpia)

– Convertible bonds

– Contingent convertible bonds (CoCos)

– Perpetual bonds

– Project bonds (e.g. A11 highway, partly guaranteed by EIB)

• Commercial paper (thesauriebewijzen/billets de trésorerie)

• Fund that pools bond issues of 8 cities (Aalst, Brugge, Lier,…)

• Quid: set up a fund that pools bond issues of a group of SMEs

4. Alternative bank financing (1)

• Asset Based Lending: lender of last resort?

• Cheaper than traditional bank debt

• Leasing

• Commercial finance - invoice financing:

– Invoice discounting: if you need financing

– Factoring: if you need financing and extra services

• Asset Based Lending (e.g. stock financing)

4. Alternative bank financing (2)

• Requirement of ‘dispossession’: pledge is only valid if the pledgor is dispossessed

of the moveable asset

– Pledge over inventory, IP rights,…: legal uncertainty

– Law of 11 July 2013 re. security interests in rem over moveable assets (not yet

in force):

• Pledge is valid if registration in online register (or if the pledgor is

dispossessed of the moveable asset)

• Big question: how much will the registration cost? Retribution, no tax

• Business pledge will (normally) be much cheaper than today

5. Alternative non-bank financing (1)

5.1. Opportunities for Shadow Banking

• Friends/group

• Supplier credit: e.g. Ingram Micro, Siemens, General Electric

• Seed capital/small amounts:

– Microfinancing: e.g. Incofin, ‘Vrienden van Bryo’,…

– Peer to peer lending: e.g. online platforms, also credit unions

– Crowdfunding:

• Gifts: e.g. Kickstarter

• Debt/equity: e.g. MyFirstCompany (no prospectus; total issue amount of less than 100.000€; has

stopped after a year) v. e.g. MyMicroInvest (prospectus approval FSMA for projects such as

Newsmonkey)

• Bolero (KBC!)

• Real property/infrastructure:

– Insurers/pension funds: direct lending

• Search for long term investment opportunities to match their long term obligations

• Insurer hates anticipated reimbursement

• Must be drawn

• See e.g. insurers provide loans for project financing, infrastructure, PPP,…

• Solvency II

– Senior debt funds

– Mortgage servicers

– REITs, PPP, vastgoedcertificaten/certificats immobiliers

– Volkslening/emprunt populaire

– …

5. Alternative non-bank financing (2)

5. Alternative non-bank financing (3)

• Credit insurers (e.g. Euler Hermes): bonding as an alternative to a bank guarantee

• Mezzanine:

– Belgium style: banks, PMV, capital@rent, VCs, family offices, business angels, private equity funds,

private placements are often mezzanine,…

– US/UK style: specialized funds (e.g. ICG).

• Funds: hedge funds, sovereign wealth funds, private equity funds, etc.

– Interesting to see how some private equity funds enter into direct debt lending (mezzanine - senior

debt - even real estate funds

• Government initiatives:

– See www.agentschapondernemen.be: subsidies, state guarantees (Gigarant from Flemish

government; apply via your bank), tax advantage (Winwinlening from Flemish Government;

www.winwinlening.be), federale Participatiefonds/Fonds de Participation (www.fonds.org),

ParticipatieMaatschappij Vlaanderen (www.pmv.eu), new law re. financing of PMEs incl. regulation

of funding loss (but risk of backlash!), ‘Bankenplan’ of the Flemish Government (incorporation of

‘KMO fonds’), etc.

5. Alternative non-bank financing (4)

5.2. Legal points of attention

• Prospectus law, laws re. financial intermediaries, etc.:

– E.g. crowdfunding

• General rules of law (rules re. banker’s liability):

– Extra-contractual obligations for creditor: credit analysis and flow of

information

– Contractual obligations: performance of the contract in good faith. E.g. no

abuse of rights in case of acceleration of the credit facility

– See hedge funds and covenant lites

– See private equity funds becoming direct debt lenders

– Intermediation by a bank

5. Alternative non-bank financing

(5)• New specific rules:

– Basel III, Solvency II, AIFMD, also MiFID, UCITS, etc.

– European Commission, European Parliament and G20: specific rules on

‘Shadow Banking’, etc.

• Beware of the general rules of law

Thank you.

Any questions?

Bram Delmotte

Associate Partner

Monard-D’Hulst

Tervurenlaan 270 av. de Tervueren

1150 Brussels

Tel. +32 (0)2.234.67.10

Mobile +32 (0) 496.578.333

bram.delmotte@monard-dhulst.be

www.monard-dhulst.be