Companies seek cash alternatives on financing drought

“Alternative money” requires nerves of steel, says Florin Tat, partner at Consilium Advisors, a financial advisory company set up by three senior bankers. It can also require patience. Consultants at PricewaterhouseCoopers in Romania drew up a list of several viable solutions for companies in need of financing, but the conditions and tax implications would dampen an impatient entrepreneurial spirit. According to Laura Toncescu, partner of D&B David & Baias , the affiliated law firm to PwC Romania, and Dan Badin, senior manager of the fiscal consultancy services division of the same company, there are several alternative ways to finance a company and to better manage the existing cash, especially on a market where the banks or financial institutions are finding it harder and harder to supply the necessary loans. In short, their list includes debt assignments, cash pooling, barters and sale and lease-back schemes.
“Securing alternative financing resources is not an easy task: the negotiations and due diligence processes are not fast-moving solutions and they require a lot of patience and strong nerves from all partners involved,” adds Florin Tat. With a banking career of almost 12 years, Tat acknowledges that even if alternative financing could become a powerful substitute for banks on the medium term, it is still banks who play the leading role on the financial markets.

Taking stock of the situation
For now, advisors say, the financial market is defined by frozen credit access and collapses in stock exchanges, which deters companies from cashing in through their initial public offerings. IPOs are one of the most appealing ways for companies to make profits. But, in such troubled times, they can be a tricky financial operation, as it is harder to predict movements on the stock exchange.
According to Iulian Panait, the president of the investment consultancy company KTD Invest, a successful IPO depends on the company structure and its management, the offering price and the current status of the stock exchange.

What's the alternative?
Funds can also be raised from investment funds, business angels, barters and financing granted by the mother companies to their local market subsidiaries. A recent study by Deloitte Romania reports that Central Europe is expected to continue to be one of the key focus points for many private equity funds.
“Despite the hopes of some a few months ago, private equity activity and sentiment in Central Europe has reached a five-year low in line with other global markets and lack of liquidity in the banking market,” said Garret Byrne, M&A transactions services leader for Deloitte in Central Europe.
The study also found “that some private equity funds are sitting on the sidelines while others are prepared to do equity-only deals and wait for the debt market to come back for refinancing.”

State solutions
Meanwhile, many business people are calling for the government to provide solutions as soon as possible. EU funds could be one, but advisers are not so confident about their viability.
“Given that the absorption of European funds is an extremely slow process, it seems that private equity funds and business angels might be potential partners in getting the necessary money for the company in need. If the financial market does not ease up in the first semester of 2009, such alternative financing could well take the place of bank loans,” said Tat.

Bonds come to the rescue
The issuance of bonds can also generate funds. On the real estate market, one of the worst hit segments from the credit crunch, Romania n real estate developer Impact is thinking of a third bonds issuance to feed its projects. The firm has already issued EUR 8.6 million of bonds to finance its residential projects Greenfield I in Bucharest and Europa in Oradea.
“This is the second bonds issuance launched and paid out by Impact since 2002, and the company is considering another one in the future,” said Carmen Sandulescu, executive director of Impact.

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Pool resources vs. barter
Cash pooling is also starting to find its way onto the local business environment as a suitable way to manage the existing cash capital within a group, say Toncescu and Badin of PwC. “Cash pooling spreads the group's current cash recordings, through an intermediary institution, which can be a bank or a company within the same group, towards the other companies in the group which need cash,” said the PwC study.
Bartering is seen as a commercial trade exchange between two companies, and PwC's consultants say it is an option for real estate developers. The company's advice for them is to first negotiate the barter alternative financing procedure with the banks when signing a financing contract for their projects. For converting blocked assets into liquid capital, PwC also suggests sales and lease-back operations and debt assignments schemes.

M&A has had its day
The Consilium Advisors representative estimates that the local M&A segment will continue to shrink, following the decrease in valuation multipliers. “Buyers that finance their takeover transactions through leverage buy out schemes depend very much on a loose credit market. Buyers that have cash, like the investment funds, are still waiting, as they believe that prices have further to fall. Sellers, on the other hand, provided they are not in a distressed situation, may consider the current price levels unappealing,” said Tat.
Consequently, the financial specialist sees as interesting M&A targets FMCG and IT&C, and does not exclude the takeover of some already started real estate projects which are facing a shortfall in financing. Romanian businessman Dan Adamescu, for example, recently acquired a residential project in Constanta which had been stopped due to the lack of financing experienced by the Norwegian developer Westhouse. According to specialists, this trend will continue.

London leads the way
As for the estimated increase in financial consultancy due to restructuring debt policies, and the banks' concern over leverage in their need to recover loans, Consilium Advisors points to the “London Approach,” a concept formerly used by UK banks in 90s and during the South Eastern Asian market crisis. It is a non-statutory and informal framework introduced with the support of the Bank of England for dealing with temporary support operations provided by banks and other lenders to a company or group in financial difficulties, pending a possible restructuring.
According to Tat, “subsequently, the banks should start with their corporate clients a process of business reorganization applied over the medium and long term,” so that the bank supports the companies in distress with financing. The result would be, according to the financial advisor, an ongoing business process and debt payment instead of blocking the entire market, because of the overall consequences for the business environment.

By Magda Purice