What is a Debt Advisor?
At a recent ‘Frozen’ themed Birthday party (#daddysociallife) I was asked the classic ice-breaker question, “What is it you do?”. Now when I was a banker, this used to be an easy one (once I had explained that I was not ‘one of those nasty Investment ones’. Not my words!). Even within the Financial community, I have found ‘Debt Advisor’ to be a commonly misunderstood role and I have often had to settle (begrudgingly) for being a Corporate Finance Advisor, which seems to be quite widely accepted as a real job (and ultimately this is what Debt Advisory is, just with a specific focus on Debt). What is certain though is that, contrary to common belief, a Debt Advisor is more than just a glorified amateur golfer!
On a serious note, it is often apparent to me when meeting a new business thinking about raising finance, that there can be some uncertainty around whether working with a Debt Advisor would be beneficial. I thought, therefore, that a short summary of the benefits of involving a Debt Advisor might be helpful?
- Best Pricing: The most commonly accepted ‘benefit’ of an Advisor is to run a debt process for a client. Going out to a range of potential lenders who then ‘compete’ for the lending opportunity creates competitive tension, which is ultimately helpful in getting the best deal. Through such a process, loan interest margins and fees are minimised and as a general rule one would expect an Advisor to save a Borrower at least as much on fees as the Advisory fee charged (caveat that this works above a certain borrowing level).
- Best terms: As part of a debt process, commercial and legal terms (and in particular Financial Covenants) form part of the negotiation from the outset. Having an Advisor on board will help to bring the key areas most relevant to the Borrower to the fore early in the process. This means negotiation of these key points takes place while competitive tension is high within a debt process.
- Process management: Timing and resource are naturally big challenges when raising finance (and there is never enough of it!) so having support from someone who knows the process and what a realistic timeline looks like for a Lender, will ensure appropriate planning can be undertaken. An advisor will also drive the process forward and should understand what strings to pull to ensure a process is delivered on time for the Borrower’s needs.
- Optimal structure: Before starting out on a debt raise, it is essential to define the borrowing requirement and right debt structure for the business. With many more specialist lenders in the market today, there is a lot of time that a company can waste talking to the wrong type of lenders, something which a decent Advisor should avoid from the outset.
- Finding the ‘Right’ Lender: Similar to point 4) above, but a key consideration is the character of your chosen Lender. Lender behavior through a process, during documentation and importantly after a loan has been drawn, are all considerations for a Borrower entering into a long-term financial relationship with an institution they will owe money to! A specialist Debt Advisor should know the relevant debt market and the quirks and personalities of different lenders. Personally I would place this factor right up there as a top priority as a difficult lending relationship can be extremely detrimental to a business.
- Preparation & presentation of information: The more relevant information that can be provided at the beginning of a debt process, the quicker and more smoothly a debt process will flow (and in many cases the level of follow up detail requested by a Lender will be lower). An Advisor will know the core information requirements of each Lender and can also confidently push back where information requests are unreasonable. While I generally advocate openness between Borrowers and Lenders (throughout the life of a borrowing relationship), minimising the level of confidential information shared widely during a debt process is a real risk management benefit.
- A bank ‘translator’: A more ‘fluffy’ upside of using an Advisor, but one that can save a lot of time and consternation. Lenders ask a lot of questions and will make requests of a management team that can sometimes feel invasive, unnecessary or even insulting! Simply by having an intermediary (especially one that has asked these questions themselves as a Lender in the past), means that misunderstandings and miscommunications can be minimised.
- Post drawdown: Once documentation has been signed and debt drawn, issues can still arise. Simple items such as documentation errors that require ironing out can escalate if not handled carefully. A particularly material area (and increasingly relevant as the economy and rates come under pressure ) is Covenant management. It is not uncommon for a Borrower to reach the first covenant testing date, only to find that ratios are tight, or again there may have been a misunderstanding during the documentation phase that may be leading to a ‘technical’ breach. Good Debt Advisors are generally experienced in assessing, analysing and negotiating such scenarios and can save a business a great deal of stress and time.
- Longer term strategy: Potentially the most valuable benefit of working with an Advisor is that they should be thinking for you on a longer-term basis than just the current transaction. Naturally a debt facility has a term at which point outstanding debt will need to be repaid or refinanced. For a growing business, it would be frustrating to raise debt from a Lender who is immediately at the maximum cap of what they can lend and cannot support longer term (meaning back to the table for another expensive process). With a longer-term debt strategy in place, appropriate future lenders can be ‘courted’ over a longer period meaning that when the time comes no-one is starting from scratch.
If your business is raising debt and you are considering working with a Debt Advisor, please email Gavin to start a conversation.