Grand Aid & Raising Finance. Welcome & Introduction Oliver Holt, Deloitte

Transcription

1 Grand Aid & Raising Finance Welcome & Introduction Oliver Holt, Deloitte

2 Grand Aid & Raising Finance - Agenda Speakers Grant Finance Joan Callaghan, Grant Assist Raising Bank Finance, Niall Corbett, Bank of Ireland Alternative Sources of Financing, Stephen Nolan, Deloitte

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4 Presentation to Leinster Society Chartered Accountants Ireland March 2014

5 Grant Finance Joan Callaghan

6 Agenda Grants the confusion Grants current overview Grants post 1 July 2014 Hints and tips

7 Grants the confusion

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9 Am I eligible for grants? Who do I contact; which agency? How much money can I get? How long will it take? Is it worth the bother????

10 Grants current - overview Eligibility

11 Am I eligible? Must be manufacturing AND exporting, or planning to export Must be providing a service to customers, majority of whom are outside Ireland

12 Grants current - overview Which Agency?

13 Which agency? Foreign owned IDA Ireland Irish owned: County Enterprise Boards less than 10 employees Enterprise Ireland 10+ employees and High Potential Start-ups. All food companies

14 IDA Ireland Greenfield and expansion capital/employment grants (only in certain parts of Ireland) R&D grants (in addition to R&D tax credits) Training grants general/specific

15 County Enterprise Boards Priming/Business Expansion up to 150,000 BUT restricted to 15,000 per job created Feasibility Study up to 20,000 Micro finance less than 25,000 Mentor

16 High Potential Start Ups (HPSU) Feasibility study grant Equity Mentor

17 Enterprise Ireland existing companies Expansion with increase in employment equity or capital/employment grants Marketing Productivity/Process improvement Research & Development Green investment Management development

18 Other sources of Grants?

19 Grants overview How much can I get?

20 Grant Finance how much can I get? Rate and amount of grant varies from programme to programme and can be negotiated in many cases. Size of company ie SME/Large is very relevant Grants will never fund 100% of what is required company must always be able to fund the balance through equity, loans, profits etc

21 Grants current - overview How long will it take?

22 Grant Finance how long will it take? Average time 2 4 months for approval Drawing down grants/shareholder agreements etc takes much longer

23 Grants current - overview Is it worth the bother?

24 Grant Finance is it worth the bother? IDA Ireland always worth it County Enterprise Board usually worth it Enterprise Ireland depends! Others icing on the cake!

25 BUT. Changes are on the way

26 GUIDELINES ON REGIONAL STATE AID 2014 to 2020 Govern the financial assistance countries can give to business New guidelines effective from 1 July 2014 What will change..

27 Key changes 1. Regional Aid map for Ireland will change not agreed with EU yet

28 Borders, Midland, West Carlow, Kilkenny, Wexford, Waterford, S & N Tipperary, Clare, Limerick Large Medium Small 15% 25% 30% 10% 20% 30% Kerry, Cork Urban Regeneration Area 0% 20% 30% All other areas 0% 0% 0%

29 Key changes 1. Capital & employment grants: Only new economic activity is eligible for large companies. Potential huge impact for FDI in Ireland and large Irish companies eg food

30 Other changes Training grants: maybe no split between general/specific. Research & Development possibly higher rate and include more activities Incentive effect much more important. Must show impact of grant aid

31 Hints & Tips

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33 Hints & Tips Prepare for meeting with agency Be clear about where your business is going Understand eligibility criteria MOST important - reasonable assumptions Understand drawdown process Review Grant Agreement

34 Thank you for your time Joan Callaghan, Principal. Telephone: Information: Website:

35 Raising Bank Finance Niall Corbett BComm ACA Business Banking

36 Contents Observations Refinancing Debt Cash Flow Assessment Trading Business Sector Examples Commercial Property, Hotels and Nursing Homes Projections General Covenants and Conditions Precedent to Drawdown General Information Requirements 36

37 Some Observations While demand for credit remains subdued, we have seen a pick up in lending in Our existing customers restructured their cost base, stabilised business and continue to focus on repaying debt growth and capital investment next? Improved market sentiment. New business is key for the banks major focus on income now so need to put income generating assets (loans) back onto the balance sheet. Still predominantly a refinance market across all segments. Process can be lengthy. Equity can be an issue for real estate transactions being refinanced from other banks.

38 Refinancing Debt Process can be lengthy can take up to 9-12 months although expect it will shorten. A full settlement position is not required before engaging with the bank. Engage early with bank to discuss possible deal structure credit policy and appetite is always evolving, sector limits etc. Can be easier to reach a conclusion on trading businesses both banks will understand what level of debt the business can service. How will the equity gap be funded for example on commercial property transactions. The process needs to be equitable for all parties and if expectations are realistic the process is easier for all involved. Professional advisors can play a very important role. 38

39 Cash Flow Assessment Trading Business When assessing the level of cash available to service debt repayments, lenders calculate the Free Cash Flow (FCF) of the business. Ebitda does not equal free cash flow. However, it is a good starting point. The reason ebitda does not always equal free cash flow is because there may be other draws on cash flow such as essential capital expenditure, taxes, dividends and movements in working capital. Note: is there an adjustment to ebitda required (once off/exceptional expenses)? Profit Before Tax 1,000 (+) Interest 150 (+) Depreciation (assets are +) 50 (+) or (-) Amortisation (if amortisation is an expense you add, if it is income you subtract) EBITDA (Starting Point) 1,220 (-) Normalised Capex (100) (-) Working Capital (30) (-) Dividends/distributions (100) (-) Taxes (125) (-) Other (share redemptions etc.) 0 (-) Leasing (50) Free Cash Flow (to service debt) 815 Bank (500) DSC 1.63 DSC EBITDA

40 Cash Flow Assessment Trading Business A lender will establish the free cash flow (using historic financials and projections with assumptions) and then assess its predictability how much cash will this business generate per annum to service debt. A sensitivity analysis is then carried out for example the impact of a fall in revenues, margins squeezed, increase in operating expenses, loss of major contract etc. Interest rate will be stress tested. Measures used to assess the company s ability to service debt include: Debt Service Cover ratio (FCF/Debt Service) Interest cover ratio (Ebitda/Interest) Debt/Ebitda ratio high level ratio of how long it could take borrower to repay facility however ratio does not take into account cash flow requirements such as capital expenditures and movements in working capital. 40

41 Cash Flow Assessment - Capital Expenditure Lenders need to understand the capital expenditure requirements of a business. If the business is capital intensive and has ongoing capital requirements, this will be included in the repayment calculation. The financial statements will be reviewed for historic spends this will give a sense of the annual requirement (check the fixed asset note and/or cash flow statement). The bank will discuss with customer future capital spends. Does the business need to purchase motor vehicles, computer equipment, leasehold improvements, plant and machinery, fixtures and fittings etc? How will this be funded?

42 Commercial Property Cash purchases in recent times, however starting to see pick up in activity and debt requirement. Bulk of investor interest is prime Dublin properties. Cash flow is key. Is net rental income (rental income less non- discretionary costs, deductibles and tax deductions) sufficient to repay debt over a period of max 15 years. Loan term (7 years max) versus repayment schedule (15 years max). Residual risk the outstanding balance of loan divided by current market value, where post expiry of leases (assuming leases not renewed), the net rental income is no longer able to service the bank s interest. Max LTV guideline is 70%. Focus is on quality of tenants and property location this will impact on the LTV. 42

43 Commercial Property Is promoter a professional investor with proven track record? Tax structure essential as this impacts on repayment capacity provide bank with projected cash flows available to service debt. Lease agreement and impact of break clauses on cash available to service debt. Provide bank with tenancy schedules, detailing when lease started, lease term break clauses etc. Property valuations will focus on market valuation, historic current and future demand for this category of property in the locality, the potential and likely demand for alternative uses, vacant possession value etc. Covenants may include max LTV, min ICR, negative pledge on property, subordination of shareholder loans, restrictions on dividends with consent of lender etc

44 Hotels Good location, well maintained hotel. Potential to retain and capture market share. Experienced and competent management. Occupancy levels, average room rate, trends, comparison with peers, reviews, marketing & digital strategy will be focused on. Max 7 year term. For loans to fund the purchase or major refurbishment of a hotel, repayment schedule should be such that loan would be fully repaid over a notional term of 15 years. Gearing: max 70% of Hotel Value or purchase price (where lower) or 5.5x times ebitda however for larger corporate transactions this gearing may be higher (up to 7.0x). Interest Cover: ebitda less maintenance capex (guideline > 2x). Debt Service Cover based on 15 years amortisation schedule (guideline > 1.2x).

45 Hotels 3 years audited accounts, management accounts and projections ideally with detailed analysis of performance under accommodation, food and beverage and leisure). Detail on level of capex required over term of loan. A sinking fund may be required for larger debts. Capex spends on back of Independent QS certificates or approved invoices. Debenture and first legal charge on freehold hotel and grounds. Deed of covenant over liquor license. Keyman cover where appropriate, subordination of director/shareholder loans. Recourse to promoter on case by case basis.

46 Nursing Homes Popular sector given over 65 s and over 85 s population is forecasted to grow considerably. Recent report s predicting that there will be a nursing home bed shortage of circa 4,200 beds by Operator calibre is key. Proven sector experience. Good track record. Nursing Home must be registered with HSE. Location is important. Financial projections will be sensitised. Minimum equity contribution guideline of circa 25% - 30%.

47 Nursing Homes Nursing home to adhere to all HSE and HIQA requirements (covenant). New build guidelines capital moratorium for a maximum of 2 years. Interest cover years 1 2 guideline is > 1.5x, years 3 7 > 2.0x. DSC guideline min 1.2x. Existing nursing homes Interest Cover > 2 times, DSC > 1.3 times. Each application should comment on level of capital expenditure over term of loan. Term max 7 years (new builds) and 5 years for existing with repayment schedules of 15 years for DSC and ICR calculations. Security to include fixed charge over nursing home (via debenture in limited company). Cross guarantees, keyman cover if necessary, recourse on case by case basis.

48 Projections Do the projections appear reasonable. The key variable in projections is the sales assumptions. Gross margins should be in line with industry norm, historic trends etc. Variable overheads should be in line with historic trends. Fixed overheads (e.g. rent) may not change at all. Bank will assess customer assumptions for reasonableness. Are projected revenues realistic how do they expect to achieve forecasts? Is industry cyclical? 48

49 Projections What are the capital expenditure requirements and how will this impact on future cash flow? Bank will perform a sensitivity analysis on the projections and how a weaker performance could impact on debt service: What if sales decrease by 10% What if gross margins decrease from say 55% to 52%.

50 Covenants Set out the banks expectations to the customer as regard future trading, net worth, security values, provision of timely information, company structure, surplus earnings etc over the life of the loan. Breach of covenants, will allow the bank to renegotiate the loan. Build in some headroom for client. Financial covenants. DSCR, IC, LTV etc Affirmative covenants. Taxes, Property Insurance, Provision of Financial Information (key warning) etc Restrictive covenants. Negative pledge, asset disposal, restrictions on dividends etc 50

51 Conditions Precedent to Drawdown Conditions the bank want satisfied prior to releasing funds Examples Perfection of security and all loan documentation. Insurance cover. Valuation report. Up-to-date management accounts. Signed audited accounts. Confirmation from auditors that tax position up-to-date. Certified statement of affairs. To be satisfied with tax structure. Due Diligence report/independent Business Review in some cases.

52 Information requirements Minimum 3 years audited accounts with detailed income statement schedules and breakdown of overheads. Management accounts classified in accordance with the financial statements to allow bank benchmark performance. Projections and assumptions. Debtor and creditor listing and comment on customer/supplier profile (domestic/international).

53 Information requirements Business Plan commentary on proposed funding amount, purpose, proposed security and equity input. Business Background, management structure, performance (historic and current), market, competitors, future and strategy. Future capital expenditure requirements. Detailed Statement of Affairs for personal/investor borrowers. Lease schedules for property transactions. Tax structure.

54 Presentation to Leinster Society Of Chartered Accountants Alternative Sources of Financing Stephen Nolan Deloitte Corporate Finance 10 th March Deloitte & Touche. All rights reserved

55 Gross New Lending m The Emergence of Alternative Financing Providers Irish SME Over-Reliance on Bank Funding % of SMEs that use or have used Bank overdraft or Loan Facilities Irish SME lending By Banks: 2010 vs PI Wh/Ret Ut/Tr/Co So/Pers/Ed H/R BA/FI Info/Comm RE Source: Central Bank Statistics Source: Central Bank of Ireland: The Importance of banks in SME Financing: Ireland in a European Context New bank lending to SMEs has decreased significantly across all sectors since 2010 Over reliance on bank funding, particularly working capital and overdraft facilities Large funding hole for SMEs Alternative financing providers will likely become an increasingly important component of the financing market going forward 55

56 Increasing number of domestic funds and other schemes wit particular emphasis on the SME sector Selected Providers Offering Targets/Strategies Private Equity/Venture Capital Firms Other Alternative Debt / Mezz Providers Enterprise Ireland ( EI ) PE firms have recently been involved in purchases of trading businesses and prime investment properties Alternative providers of debt and mezzanine financing EI provide a wide range of grant and mentoring programmes to SMEs and midsize corporates. Equity and other funding supports are available particularly to startup companies Strategy is to target stressed and distressed trading businesses and landmark property Strategy can vary on the basis of assets acquired Bases funding decisions on the level of support required, the potential employment and sales benefits as well as regional and other considerations 188 Seed and Early Stage investments by EI supported funds in 2013 Microfinance Ireland Microfinance Ireland administer the Government s Microenterprise Loan fund issuing credit finance between 2,000 and 25,000 to start-ups and small companies Targets small enterprises where credit has been declined by banking institutions National Asset Management Agency ( NAMA ) NAMA provides vendor financing to purchasers of commercial properties held by its debtors and receivers Given the lack of liquidity in Irish debt markets NAMA s aim is to support sales of its loans/real estate Expects to issue 2bn of debt over 4 years from

57 Private Equity / Venture Capital Description Investment Size 2-10m 2-10m Targets / Strategy Looking to invest in ambitious firms which already have an annual turnover of 15m to 50m with the aim of bringing them to the 100m to 200m level Looking to invest in family businesses with growth potential. Primarily focused on manufacturing and services businesses with low risk and stable yield profile m 2-10m 2-10m Looking to invest in opportunities across all sectors Looking to invest in Irish opportunities with high growth potential (not sector specific); 125m fund backed by Enterprise Ireland. Looking to invest in Irish opportunities. In final stages of deploying a c. 70m fund. Columna Capital 5-15m Looking to invest in Irish opportunities with high growth potential (not sector specific). VC Funds becoming more focused on specific domains Greater emphasis on attracting foreign capital and smart money 57 57

58 National Pension Reserve Fund ( NPRF ) Funds (Ireland Strategic Investment Funds) Fund Investment Quantum Targets/Strategies SME Credit Fund Lending will be at competitive market rates with loans ranging from 5m - 45m (averaging at 15m) 450m fund State committed 200m Focused on larger SME s and mid-sized corporates Overleveraged firms too much debt but viable businesses Also plans to acquire and refinance loans close to maturity where existing lenders are not willing to provide new lines of credit SME Equity Fund SME Turnaround Fund Minimum 5m Case by case 300m - 350m sized fund State committed 125m Focus on investing in healthy businesses seeking to grow, including those with overleveraged balance sheets 100m sized fund State to commit 50m Focus on underperforming businesses at point of insolvency but have the potential for financial and operational restructuring C.40% of capital invested will be used to buy the business and c.60% to finance the turnaround 58

59 Other Sources of Expansion Capital Corporates China Description Chinese Corporates Irish Immigrant Investor Scheme 25% of all deals now involve a corporate Investor Corporates invest strategically to keep at front of innovation curve Gives a first look at new and emerging technologies and trends Spurs innovation internally Very Important in certain sectors such as tech and life sciences Comment A number of Chinese Corporates are looking to invest and expand in Western Europe, particularly Ireland. The recent expansion of the Irish Investor Visa programme has increased appetite from Chinese investors to invest directly in Ireland. Each must invest a minimum of 500k to qualify for the programme. Other Sources of Capital Stock Exchange (ESM) Equity market designed for growth companies and designed to meet the funding needs of companies at earlier stages in their development. (Minimum 5m placement) High Net Worth Individuals Source capital through an individual or syndicate of high net worth investors. EIIS Scheme Tax Based Investment Scheme. Can be secured through: EIIS managed fund HNW Individuals seeking tax relief Mom and Pop investors Crowdfunding Limited presence in Ireland Absence of regulation 59 59

60 Stephen Nolan Deloitte Corporate Finance snolan@deloitte.ie Deloitte & Touche is the Republic of Ireland member firm of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see deloitte.com\about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Member of Deloitte Touche Tohmatsu Limited 2014 Deloitte & Touche. All rights reserved.