Prior to trade by-batter in economic development of the world, lending has been one of the fastest and most affordable ways to implement large capital-intensive projects, finance current expenses and pay off previous debts. The latter reason has led to the growth of corporate refinancing around the world, especially during period of prolonged crisis and market uncertainty.
The term “refinancing” is also used in the meaning of loan rollover. As a rule, this process is carried out by issuing a new loan instead of the previous one or by exchanging old bonds for new ones.
The purpose of refinancing is mainly to improve the terms of the loan (maturity, payment schedule, interest rate), as well as to combine several debt obligations into one more acceptable loan for business. In some cases, companies request refinancing when they need significant additional funds in excess of the original loan.
Unlike refinancing, restructuring is associated with short-term stressful situations. Instead, refinancing is more suitable for companies that perform well in the short term and continue to generate sufficient cash flow. Concluding a refinancing agreement on suitable terms requires a certain amount of effort from the business.
In particular, the borrower must prove reliability and creditworthiness to the financial institution. Like any other loan application, the refinancing application is subject to detailed review.
The conditions that a borrower must meet relate primarily to its assets and financial statements. It is obvious that a low credit rating can negatively affect the offered terms and interest.
Economic factors also have a strong impact on corporate refinancing conditions for enterprises.
Banks and financial institutions are usually more willing to provide loans for refinancing when the country’s economy is developing and forecasts for the near and distant future are positive.
While refinancing may seem like an easy way to get more money, it can turn out to be disadvantageous for borrowers. We recommend that you carefully study the proposed terms in order to assess the real value of money and understand the potential risks of a new agreement.
Business refinancing: some reasons
The decision to refinance a previous loan can be made not only in the context of improving conditions in the financial market and the emergence of more attractive financial products.
This decision may be forced, taken by the company’s management against the background of objective problems of an internal or external nature that negatively affect the performance of the business. Timely identification of business financial problems that could disrupt debt service and require corporate refinancing is an important task for both financial institutions and the management of the borrowing company.
In developed countries, the identification of problem loans has long been put on stream. Specialized departments of banks are guided by a complex, well-developed system of criteria for predicting potential problems for borrowers and taking timely measures, including restructuring and refinancing.
The reasons for refinancing businesses can be as follows:
A}Reduction in the company’s revenue, increase in accounts receivable or payable, which is accompanied by the risk of non-payment of debt. In some situations, the problem is caused by the sale of products to insolvent buyers, which requires the bank to use additional restrictive measures to reduce accounts receivable and maintain the borrower’s solvency in the long term.
B}Insufficient initial investment, which requires additional funding for the successful implementation of ongoing projects. This situation may arise due to the mistakes of the borrower’s financial team at the investment planning stage or in the event of negative factors of force majeure, as well as in case of unfavorable market changes.
C}Low efficiency of management decisions. Management problems can arise as a result of abrupt changes in the management of the company, changes in the structure of the business or the transfer of the company to new owners. Wrong decisions related to large investments, entering new markets or other capital intensive projects can affect the borrower’s ability to service debt.
The role of refinancing in the implementation of long-term investment projects
In project finance schemes, the risk of early repayment of a loan is a typical risk borne by banks. If the same lenders finance the construction and operation phases, they bear the risk of early repayment of the entire loan by the SPV
This is a likely situation, since the loan provided at the beginning of the project is quite expensive due to the high risk. Once construction is completed and the project is successfully launched, the risk is reduced and the SPV can refinance the initial loan with better financial products. To avoid this, banks usually provide for early repayment of loan payments with an additional fee. To avoid the described situation, financing of individual phases of construction under the PF is organized independently. Different syndicates can be the source of financing for the construction of the project and the operation.
The optimal solution is to pay off a construction loan at the time of production start-up and take a separate loan for the operation stage. However, it should be noted that in this case the SPV cannot repay the initial debt on its own, and in the event of problems with refinancing, the banks financing the construction bear an additional risk. To minimize this risk, all funding (even if organized by independent syndicates) is usually provided during the planning stage. In this case, the second loan syndicate most often guarantees the repayment of the main loan.
However, since the implementation of the project can take up to several years, and the project itself is subject to high uncertainty, it is not always possible to obtain long-term loans for the operational phase at the very beginning. In this case, the original lenders usually ask the sponsors for a loan repayment guarantee. Additionally, in order to motivate participants to arrange for further financing, the interest rate on the loan increases over time. However, more often than not, all financing is provided by one group of lenders, which provides higher financial flexibility and allows better risk management of the project, involving banks in accepting and minimizing risks.
Securitization as a business refinancing tool
Securitization is a refinancing instrument, in which a portfolio of assets is formed, and liquid securities (stocks or bonds) are issued against them. These securities are offered for purchase by the investment community. The initiator is a financial institution that creates a special investment purpose company (SPV) for this purpose. Due to heightened competition in the market, it can be expected that the value of accounts receivable in the portfolio of enterprises will increase.
This is a serious challenge for creditor companies. Traditional methods of financing receivables are no longer sufficient, and appropriate forms of alternative financing such as asset-backed securities (ABS) securitization must be used. Securitization makes it possible to raise funds even for those companies that, due to their low credit rating, cannot do it directly. The issuance of ABS is a complex and multi-threaded financing process that requires significant costs for the borrower. This business refinancing tool can only be used by companies that meet high qualifications and have suitable pools of receivables. Securitization with ABS can be used by both commercial organizations and local governments or other market participants requiring refinancing of their debts. A company, financial institution or local government body, called the initiator (organizer), interested in selling its debt, can obtain funds in the financial market by selling the assets of a specially created independent company.
For this purpose, the initiating companies create a separate legal entity and transfer part of the assets to it. Subsequently, SPV issues commercial debt securities against these assets and sells them on the financial market. The funds received from the sale of these securities are used to pay off debt obligations to the initiator of the program. In this way, the initiator company indirectly attracts the required funding.
Refinancing for businesses: our services for large companies
Havelet Finance Limited offers a business loan refinancing. We are ready to develop an optimal scheme for refinancing investment loans intended for the purchase of land, construction and modernization of large facilities, as well as for the repair or renovation of fixed assets.
• Loans in euros or other currencies at the request of the client.
• The maximum amount of financing is up to 100% of the investment cost.
• Corporate refinancing of both operating and under construction enterprises.
• Long term and flexible payment schedule.
If you are interested in loan refinancing or other financial services, please contact Havelet Finance Limited. By cooperating with the leaders of the global financial market, you guarantee the stability of your business in difficult market conditions. We mainly work with large loans of 500 million euros or more.
Contact us now to find out more.