Since the global financial crisis, concerns around shortfalls in refinancing and new money opportunities have regularly made the press.

However, developing trends in the UK mid-market indicate that the potential impact of the refinancing wave may not be as severe, with UK mid-market borrowers finding ways to ride out the storm.

With many UK banks sitting on over-exposed balance sheets and facing increasing regulatory constraints and high costs of funds, liquidity still remains a pressing issue for banks.

Banks are generally more constrained as they prepare and delever for Basel III, potentially resulting in a lower risk appetite or pricing risk at a premium.

With banks making little return on lending in the current economic climate – due to inflated costs of funds – there is concern that banks may retreat further, concentrating on ancillary business to boost returns, key customer relationships or sector focus.

If this is the case, it could have implications for the availability of bank funds for many UK businesses.

Despite the continuing pressures on bank lending in the current economic climate, there does appear to be liquidity in the market at present, with a high level of competition among banks as well as new senior fund entrants for strong credits.

Batten down the hatches

A number of trends in the current market help to shed light on the potential impact of the refinancing wave on certain classes of borrowers.

Investment grade borrowers, uncertain of the economic outlook and facing a lack of M&A and investment opportunities, have been deleveraging and, in many cases, are now sitting on excess cash.

This is evidenced by a growing trend of listed companies increasing returns to shareholders. For example, Stagecoach Group recently returned nearly £350m of capital to its shareholders.

Many UK investment grade borrowers with good ratings and large ancillary banking requirements have been able to refinance over the past two years on three-year – to even five-year – money, pushing the next investment grade maturity wave out from 2013 to 2016.

While these larger corporates continue to behave cautiously, and with the added benefit that investment grade borrowers should be able to tap into capital markets to pick up the slack from traditional bank markets, they are less likely to struggle to find refinancing opportunities than smaller to medium-sized enterprises.

Leveraged mid-market space

But what about borrowers that may struggle to delever and build up cash reserves? The potential impact of the refinancing wave is greatest for the leveraged market; a market heavily dependent on large quantities of debt issued in the boom years against sharp growth expectations which, in many cases, have not been achieved.

DC Advisory has carried out a detailed analysis of a spread of UK leveraged mid-market maturities and the trends they see emerging in dealing with the funding gap.

The analysis demonstrates that, as with the investment grade market, it is not all bad news for borrowers at present, with debt-driven solutions more readily available.

DC Advisory's analysis helps to highlight current trends and identify the potential future pitfalls for UK leveraged mid-market borrowers in dealing with the refinancing wave.

We analysed the debt maturity profile of UK portfolio companies of nearly 50 mid-market private equity sponsors. The sample consisted in total of about 340 companies, for which information relating to both leverage and maturity was publicly available on roughly 150 investments.

The aggregate total debt outstanding and maturing over the six-year period to 2018, of the borrowers sampled in the analysis amounted to about £30bn.

The analysis was first carried out in Q1 2011, and was updated in Q3 2012, bringing out some interesting trends.

Amend-to-extend

The proportion of UK mid-market leveraged debt due to mature in 2012 and 2013 reduced from 19.5 in Q1 2011 to 7.7% by Q3 2012 (see chart 1, right), showing that the majority of borrowers have addressed their maturities over the past 18 months.

Forty-three of the borrowers sampled (in value terms) who have successfully addressed their 2012 and 2013 maturities opted for debt-driven solutions to push back their refinancing requirement, including 42 through maturity extensions.

A similar number of borrowers sampled (47 in value terms, equivalent to more than £2.8bn of debt outstanding) are still to tackle their impending maturities.

These borrowers have, on average, high net leverage of more than 6.7x on average, giving rise to serious concerns about the viability of their capital structure.

Some of these borrowers have already started restructuring discussions with the relevant stakeholders. The likely outcome of these discussions remains unclear to date.

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