Elías Martínez, Partner

Elías Martínez in The Economist EleconomistaDic18EliasMartinez

The market is keenly aware of the number of small companies and their need to grow in size in order to be more competitive and thereby achieve success in an increasingly global economic context.

In Spain in general, and in the Basque Country in particular, we have a good number of medium-sized companies with technological capabilities and industrial resources whose strategies for growing in size include the possibility of acquiring other companies.  Few, however, actually go through with it and even fewer do so successfully.

There are different reasons for not implementing such a strategy, although one of the main ones is the lack of financial resources. This is due to the fact that they have not devised an adequate financing strategy to attain the desired target.

Such a strategy must take into account all available resources, including traditional (capital and reserves plus bank financing) and alternative sources, for a more sophisticated and innovative financing model.

What are alternative sources of financing and how are they used?

Traditionally, the only sources of financing for SMEs in Spain consisted of the company’s own capital and reserves combined with bank loans. Bond issues and other alternatives were reserved for large corporations with an investment grade rating, generally Ibex 35 companies.

Following the economic crisis of 2008 and starting in 2012-2013, foreign private debt funds began to arrive in Spain, offering direct financing to companies as an alternative to the scarce bank financing that was available at the time, with more flexibility (although also more expensive).

At the same time, the Alternative Fixed Income Market (MARF) was being promoted by the Ministry of Finance with the aim of becoming a reference market for the financing of medium-sized companies through corporate bonds. The MARF has had approximately 40 bond issues to date.

Alternative financing provides multiple advantages for companies:

  1. Diversification of financing sources so as not to depend exclusively on a limited number of banks which, in a financial crisis, all tend to restrict their lending simultaneously.
  2. It allows companies to assume higher levels of debt than banks.
  • The financing can be used for a wider variety of purposes: to purchase a company, buy out a minority partner, pay dividends from the debt or financing funds, finance real estate development, etc.
  1. It is known as bullet debt, i.e. the principal is not amortized until maturity, thus enabling greater leverage over a longer period of time.
  2. It provides greater flexibility in the covenants; and
  3. The process is much faster than bank financing, with transactions closing in just a few weeks.

In addition to Debt Funds, the main financing alternatives available to companies are as follows:

  • Bonds/Promissory Notes: Bonds/promissory notes offer most of the advantages of alternative financing at a lower cost. The advantage over private debt funds is that the structure is quite standard due to the multitude of investors involved in the issue. They require authorisation from the market where they are to be issued, a prospectus for investors and a rating by a regulated rating agency.

They are generally issued for 5-7 years, at rates ranging from 4% to 7.5% for amounts over 15-20 million on the MARF and Euronext exchanges.

  • Private Debt Funds: There are various types of private debt funds and they are generally much more flexible than bond issues.

The terms are usually between 4 and 7 years and the rates are generally higher than those of corporate bonds, depending on the level of risk. They require due diligence and amounts can range between 5-10 million euros.

  • Crowdlending: Crowdlending platforms can be a suitable instrument for small amounts of less than 3 million Euros. Loan terms range from 1 to 7 years with rates starting at 4%.
  • IPO (MAB / Euronext / Alternext): The Alternative Stock Market and its European counterparts offer good opportunities for companies that require financing in the form of capital from €5 million up looking to provide their shareholders with liquidity.
  • Private Equity: Bringing an institutional investor on board to finance growth is an alternative that can provide knowledge and experience in the sector in addition to financing. This requires price negotiations and is usually a lengthy process. It should be noted that these are temporary partnerships that require a divestment option and involve shareholders’ agreements.

The growth strategy through acquisitions must be accompanied by a financing model that specifically allows it to be carried out without conditioning the financial structure of the business itself. The chances of securing funding are currently very good as there are multiple channels and providers of resources looking for projects in which to invest.





Jan 07, 2019




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