Finance teams have seen storm clouds gathering for some time. The recent rise in interest costs and the decreased value of the pound add intensity to that storm.

In our recent series, More Flow, Less Friction we highlighted some practical considerations for the many businesses now reviewing their debt facilities to ensure that they have adequate facilities on appropriate terms for the foreseeable future.

With interest rates set to rise still further in the coming months, consider these five ways to help your business to weather the storm.

1. Flex in your facility options

If you haven't already secured a new debt facility, consider what options you have under your existing loan documents to extend or increase commitments.

Do your existing facilities have an option to extend their term? Remember that, typically, there is no obligation on lenders to agree to an extension so expect a price negotiation if you want to secure an extension. You will need to weigh up whether the relative certainty of committed facilities for a longer term is worth the additional cost. Of course the cost of that protection may continue to rise over time.

Will you need increased facilities? Do your existing facilities include an accordion – a mechanic for you to request an increased facility? Again, typically there is no obligation on lenders to agree to the increased facilities and you should expect a pricing negotiation. But is that price (including the commitment fee on the undrawn amount of increased facilities) worth paying for the knowledge that you have the security of an increased committed facility?

Not all existing lenders will want to extend or increase their share of committed facilities. Which new lenders might have appetite to take some commitment? In this context, think both about your geographic footprint and the sector in which you operate. Think too about what ancillary or other income might be available to your lenders and how you share those opportunities to optimise your core debt facility.

2. Forward Start Facilities

Consider securing a new facilities agreement with your existing lenders, even before your existing facilities mature.

Although forward start facilities may come at a higher pricing, with increasing refinancing risks, if you can secure continued funding in advance and obtain sign-off from your auditors on the adequacy of your cash flow forecasts, the pros may outweigh the cons. 

As with the other facility options, there is no obligation on lenders to agree to any new facility. However, engaging your lenders in these discussions before you actually need to, should give you a good indication of which lenders would be prepared to offer some support and commit longer term liquidity. Knowing whom you can bank on in these times is key.  

You should seek to negotiate the forward start facilities on substantially the same terms as your existing facilities in order to avoid diminishing your existing facility position. 

3. Hedging

With interest rates having been low and stable in recent years, few businesses have hedged their interest costs. Now that rates are on the rise, hedging too will be more costly. For your business, is the price of cost certainty worthwhile? 

Does the falling value of the pound create new foreign exchange challenges for your business? Are your costs denominated in currencies that are now strong as against sterling? Might it be worth exploring your FX options in order to gain some certainty?

Does your business have other significant (and rising) costs where commodity hedging might be an option?

4. Supply chain stability

How robust is your supply chain? Beyond any FX considerations, do your primary suppliers have sufficient financial strength to weather rising costs? One option might be to improve cashflow for your suppliers by putting in place supply chain finance. Typically with supply chain finance, the supplier enjoys accelerated payment of their invoice by the lender – albeit at a discounted rate. On the usual (deferred) invoice payment date, the buyer pays the lender the full amount of the invoice. In this way, the supplier's cashflows are enhanced, the buyer's cashflows are not put under pressure, and the lender makes a return.

5. Forecasts

Given the multiplicity of factors now affecting financial performance, if you have not already done so, now is the time to increase the frequency with which you revisit your forecasts and retest projected financial covenant compliance. 

Why AG? We work in this space all day, every day with all of the lenders who will provide your corporate debt. But we're completely independent. If you need a trusted advisor to help you weather the storm, get in touch.

Key contact

Amanda Gray

Amanda Gray

Partner, Co-head of Financial Services Sector

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