Due to a lowering in their sources of income, some companies need to increase liquidity. They do so to be able to continue with their usual activity. Others plan increases in capital to carry out opportunistic acquisitions. It is these companies that have best coped with the pandemic.
The J.P Morgan Asset Management bank believes that capital raising activity in 2021 will again focus on inorganic growth, with M&A operations (mergers and acquisitions).
Another way of obtaining financing is through the sale of a non-strategic businesses by large corporations.
The injection of liquidity in the system has not been used for investment, since only 4.8% of ICO credits have been granted for this purpose.
The Instituto de Crédito Oficial, Corporate State-owned Entity (henceforth, ICO), has granted Record of Temporary Employment Regulation (ERTEs) and loans with State guarantees that have solved the liquidity problems of the companies in the short term, but the lengthening of the terms (from 12 to 24 months of grace of ICOs and from 3 to 8 years for the loans) has turned the indebtedness into over-indebtedness and structural deterioration of the balance sheet. These sources of financing have been cheap money for companies.
A freelancer or an SME has to meet a requirement in order to receive a loan: they can’t have been into default or involved in any bankruptcy procedure. Companies that have not used debt before, if they operate in sectors affected by COVID, they won’t pass the risk committees of the banks. Therefore, these companies do not have liquidity. Instead, banks have used these lines to refinance existing positions. Thus, 80% of the risk is assumed by the State. In total, more than 115,000 € of financing was received and almost 959,000 loans were approved.
A total of 99% of the companies that received financing were freelancers and SMEs.
In some cases, ICOs and ERTEs have postponed bankruptcy procedures. Within the companies that enter bankruptcy, approximately 90% of them end up in liquidations.
Before coming to this situation and if the creditor banks of a company demand the amortization of the debt, the solution is to request a significant reduction. In this case, the bank would pledge the shares of the company and if they fail to execute, they do not cause the company in question to have to declare bankruptcy.
It is at this point where debt funds come in, relatively new players in the financial sector. If part of the activity of a company is viable, the working capital can be financed, almost always or always through the negotiation of a rebate with creditor banks.
The price for this type of financing can be around 12% of the annual cost, and invoices are discounted based on the solvency of the debtor. It is a credit against a line of activity that is recurring. The appeal on contracts is complex, a global assignment of contracts would be in order.
Written by Lali de Juan and Marta Clemente