COVER STORY: Rise of the banks
Bankers are causing tremors of excitement. traditionally staid and secretive moneylenders are pushing the boundaries of their age-old remit, nagging at the heels of venture capitalists. Lisa Miles reports on the changing face of banking read on....
LITTLE EARTHQUAKES
Banks are evolving. Eager to jump ahead of the competition, each believes it offers a service, a package, a raison d'xeatre that is better than everyone else's. Each attests to being the market leader in relationship banking, tailored solutions and innovative packages. Each is widening its presence in the mid-market by offering innovative debt and equity products or debt-only packages. But as institutions push at the boundaries of traditional banking, the greatest challenges lie in convincing the market that banking has changed and that 21st century banking complements rather than competes with other funding options.
The buzzword is mezzanine: tranches of higher risk and higher cost funding that banks have long offered in packages with standard senior debt. But in recent years mezzanine funding has been taken more directly into the regions through locally-based specialist teams and has enabled banks to take larger, more high-profile roles in corporate finance transactions. Traditionally in buyouts or buy-ins banks have acted as debt providers alongside venture capital (VC) equity investors. But with evolving product ranges banks can now go it alone, establishing a blend of returns across the different financial instruments.
"At present the mindset and training of bankers is likely to mean that mezzanine products are viewed as junior debt rather than senior equity, leveraged off consistent and maintainable cashflows rather than being focused on the higher risk, capital gain approach of the VCs," says John Farnsworth, corporate finance partner at Smith Cooper Corporate Finance in Derby. "However, this is changing as advisers, bankers and VCs increasingly move between the various corporate finance roles with the cross-fertilisation of ideas and experience."
Bank of Scotland (BoS) has taken the mezzanine concept further than any other bank. In March this year it provided an integrated debt and equity package of £3134.8m to support the buyout of Burndene Investments, the Hull-based manufacturer of holiday homes. BoS now holds 30 per cent of the formerly public company, with management holding the remaining stake.
This integrated finance (IF) offering was launched in April 2000 when BoS became aware that the VC community was focusing on larger growth stories in technology, media and telecoms and moving away from more traditional sectors such as manufacturing. "There were a number of sustainable cash-generative businesses that had been around for a long time and were finding it difficult to source private equity," explains Ian Guthrie, BoS director of IF for the Midlands. "We decided to set up a small IF team because of our track record in acquisition finance and the experience we had built up in that area, combined with our joint venture activity. Very early on we faced the challenge of trying to raise awareness in the market."
That challenge seems to have been overcome now that everyone is talking about IF. At the start of January BoS decided to regionalise the IF team, which had been based solely in London and Edinburgh, by merging it with the old regional acquisition finance teams. In Birmingham former acquisition finance chief Trevor Foster has moved on to be head of corporate banking on the relationship side and is replaced by Guthrie and Stuart Winton, director of integrated and acquisition finance.
The greater challenge now is to convince the wider community that IF is not designed to compete with private equity. Many players have already made room for the product. "BoS is focusing on lower growth, high-yield opportunities," says Richard Bishop, 3i director in the Midlands. "And while these are investments we may look at, it is a different way of investing in a business and interacting with a management team. A bank's approach is to dominate the cashflow of the business. We are focusing on working with management to add value to the business and to drive growth and capital value, providing equity returns for us and management."
The equity injections made by a VC and the minority equity stake taken by a bank differ in approach and significance, as reflected by the very nature of banking as low-risk investment activity in steady businesses. BoS is at pains to stress that IF is not an alternative to private equity or venture capital.
"The IF product is complementary to the VC product because it closes the loop for management teams," says Winton. "It gives them options that were not available. We are covering a market that nobody was after." As a bank BoS is not looking for capital appreciation or a short-term exit but rather for sustainable long-term cashflow. It is a minority shareholder in the business, so unlike the VC does not have a controlling stake. It does, however, have the right to appoint an independent non-executive director.
Despite BoS's explanations, banks that have not yet gone down the equity route often reason that they do not want to rock the boat with private equity houses. But given the inherently secretive nature of bankers, it is not entirely clear which banks are seriously considering IF for themselves. Some of them would even rather not disclose whether or not they offer mezzanine funding. And thanks to the equally secretive nature of corporates, some cannot disclose what type of funding has been used in transactions.
Advisers say that both IF and the complex all-debt transactions now offered by most banks create tensions. "VCs are seeing banks competing for deals while at the same time they are feeding the banks with transactions, so tensions are growing," says Phil Burns, joint managing director at Clearwater Corporate Finance. "I think it will be interesting to see whether VCs will start to favour banks who are not trying to step into their shoes."
But debt packages, with mezzanine funding, working capital, invoice discounting and other funding solutions, are also helping private equity houses out of tricky situations. They provide another option for refinancing buyouts when exit routes such as flotations or trade sales are closed.
"The equity houses have not got their traditional exit routes but the businesses have done well and generated cash to repay their debt," explains Mike Ellwood, regional director for corporate and structured finance in the Midlands at Royal Bank of Scotland.
"We have put refinancings together to allow the equity houses to get some money out and to help management. The VC industry has a lot of investments for which there is no ready market."
Banks are stepping into the gap where private equity is not interested and where there is a strong underlying business. With a combination of debt and mezzanine products the banks provide more funding for a higher and blended return. "We have moved into a lower growth, more stable environment. It's less exciting for some equity investments but for debt you have long-term visibility on earnings and can structure on yield return rather than capital return," says Ellwood. For the right businesses with strong cashflow, good management teams and a stable market, banks are prepared to stretch cashflows a little further.
Mark Bolshaw, director in acquisition finance at Lloyds TSB Corporate in the Birmingham, explains that more flexible packages fill the gap for a company between senior debt and equity with a greater level of funding. "It's debatable whether that's riskier. You are funding more against the enterprise value of the business than you were in the past, but doing it with mezzanine where you are something between a debt player and an equity player. You are looking as much at the future potential performance of the business as at its historic performance."
Gary Davison, regional managing director for the Midlands at Enterprise Finance Europe, the asset-based lender funded by the Bank of Ireland, does not believe that IF and mezzanine compete with private equity. But it is important for a business to understand what it is getting. "IF is a fantastic product and BoS do it very well, but the downside is that it is so covenant-driven," he says. "Banks have formulas but forget that the business can't always afford to repay the debt, can't meet performance criteria. Rather than being a partnership it can become adversarial."
It is the same story with mezzanine. A bank's priority is to gain immediate interest repayment on debts. "A mezzanine piece is saying that they will put the money out there, but if you breach covenants they want the money back," says Davison. "It works well for good news stories. But the VCs are much more patient. Their attitude is different because the culture is different."
What lies behind the spread of innovative products and the debate over banks' position in the corporate finance community is an increasingly proactive approach. To meet the demands of the region's businesses banks have brought all their specialist services to the Midlands and are becoming involved in transactions at an earlier stage.
"We have found that while it is vital to keep strong links with tier one professionals and corporate finance houses, we are actively contacting and marketing corporates," says Graeme Strommen, head of corporate and structured banking at HSBC in Birmingham. "We have seen a more positive start to 2004 and activity levels are up in the last year by as much as 50 per cent. Perhaps that's reflective of our becoming more active through our corporate banking centres, but also the market is beginning to improve generally." HSBC now has 22 regional corporate banking centres in cities across the UK, including Birmingham and Nottingham.
BoS is also on the origination trail as it aims to double its UK market share by client number in five years. "In that context we have at a minimum of 250 clients in five years between ourselves and our relationship banking colleagues," explains Winton. "However, for acquisition and integrated finance you're looking at doubling the deal numbers that we are doing at the moment in order to achieve that." That increase will come from both sides of the BoS offering, with the 12-strong acquisition team set to deliver more than the smaller integrated team, although both will increase activity.
At Lloyds TSB relationship directors have been trained in focusing on transactions, how to look for them and how to feed them out into the market. "We recognise that if we're able to generate business out of our own banking portfolio then we are less reliant on other people," says Bolshaw. "Everybody is trying to get to deals earlier so that they can exert greater influence."
The smaller banks promote their own brand of relationship banking. Handelsbanken is continuing its UK expansion as part of a strategy to move into a core mid-market UK corporate business. The expansion will see the establishment of 20 branches by the end of next year, of which there are already 13 including one in Nottingham. Pat Hanlon joined the bank as head of corporate banking in the Midlands from the Co-operative Bank in early 2004.
"We are working on a strap line - 'daring to be different' - because as all the big banks homogenise there is very little to choose between the big clearers. We are customer-led and that is part of the Handelsbanken philosophy. For 32 years in Sweden we had the highest customer satisfaction ratings of any Nordic bank," says Hanlon. All decisions are made locally. "We don't have products; there is no product push and nobody lays down targets. My managers are not chasing targets but buying into a vision. If you look at what other banks are calling relationship banking, we are two or three levels above them."
Birmingham-based NM Rothschild sources all its deals from the market. Like Handelsbanken it sets out to be different from the clearers. "We operate a relationship model for deals, with the manager looking after it through thick and thin after the deal has completed," explains assistant director Simon Osmond. "We are not a volume player and are selective in the business we do."
In a crowded market where the average businessman would have difficulty in differentiating between one bank and another, a proactive approach and a suite of flexible products are enabling banks to strengthen their footings in the regional corporate finance market. And their efforts are paying off.
"You need to be proactive these days. Competition is strong so you need to look for ways to be innovative," says Ian Tetsill, head of leveraged finance Midlands at Barclays. "We are all having to be proactive because the regional markets have been at a low over the last two or three years. We are starting to see activity pick up; slowly but surely there are more deals around."
Handelsbanken
Corporate banking staff in Midlands: 10-12
Offices: Birmingham, Nottingham.
Key individuals: Branch managers Pat Hanlon in Birmingham and Colin Kirk in Nottingham.
Types of finance offered: Senior debt, working capital, property finance, trade finance services.
Recent deals: None that can be disclosed.
Bank's position on equity: "We are not looking to be a mass-market offer," says Hanlon. "Everyone is offering more money or cheaper pricing to do a deal. Integrated finance is just a way of getting more money into a transaction."
Bank of Scotland
Corporate banking staff in Midlands: 250
Offices: Birmingham, Nottingham, Leicester, Cambridge, Milton Keynes, plus a further 18 business centres.
Key individuals: Stuart Winton, director of integrated and acquisition finance; Ian Guthrie, director of integrated finance; Trevor Foster, head of corporate banking; John McWilliam, director of corporate banking, West Midlands; Ken Brown, director of corporate banking, East Midlands.
Types of finance offered: Debt and equity finance for corporate acquisitions including MBOS, asset finance, cashflow finance, specialist property finance.
Recent deals: Integrated debt and equity package of £3134.8m to support the buyout of Burndene Investments, the Hull-based manufacturer of holiday homes, early this year; debt and equity for the £315m secondary buyout of Wimpy Restaurants from Bridgepoint, LDC and 3i in 2002.
Bank's position on equity: Market leader with its integrated finance offering.
Royal Bank of Scotland
Corporate banking staff in Midlands: 492 across corporate and commercial banking.
Offices: 16 including Birmingham, Coventry, Cheltenham, Derby, Leamington Spa, Worcester, Wolverhampton and Nottingham.
Key individuals: Adrian Gill, managing director, corporate banking, Midlands; David Hersey, regional director, corporate banking, Birmingham & West Midlands; Rupert Boddington, regional director, corporate banking, East Midlands; Mike Ellwood, regional director, corporate & structured finance, Midlands; David Hastings, director, Midlands property finance; Shaun Kelly, regional director, commercial banking, West Midlands; Derek Brewer, regional director, commercial banking, East Midlands; David Houghton, regional manager, international trade, Midlands; Nigel Mills, regional director, commercial services.
Types of finance offered: Working capital, asset finance provision by Lombard, loans, leveraged finance, equity finance, interest rate and risk management, debt capital markets, structured finance, trade finance, international cash management.
Recent deals: Nottingham-based car dealer Pendragon's recent acquisition of rival CD Bramall for £3230m early this year; refinancing of MBO of Brownhills-based electrical group Electrium with LDC; 3i's £310m MBO of Spaldings, the Lincoln-based wholesaler of agricultural and grasscare machinery parts and accessories in January 2004; secondary buyout of Warwick-based refuse collection vehicle manufacturer Dennis Eagle by ABN Amro in January 2003.
Bank's position on equity: Doesn't do equity at the moment but is big in mezzanine.
Allied Irish Bank
Corporate banking staff in Midlands: 10
Offices: Nine branches throughout East and West Midlands with main corporate banking office in Birmingham.
Key individuals: Stephen Breen, regional manager, corporate banking, Midlands.
Types of finance offered: Tailored solutions including working capital finance, capital expenditure finance, development project finance, expansion finance, acquisition finance, term debt, commercial mortgages. Access to in-house asset finance arm.
Recent deals: Buyout of Nasmyth from Nottinghamshire-based Bulwell Precision Engineers; BIMBO of Staffordshire-based Mercury Inns; refinancing for Staffordshire-based racecourse group Northern Racing, owned by Chepstow Racecourse plc.
Bank's position on equity: Will consider under certain circumstances.
HSBC
Corporate banking staff in Midlands: Seven in the specialised financing team in Birmingham, plus managers of the regional corporate banking centres.
Offices: Birmingham, Leicester, Milton Keynes,
Key individuals: Graeme Strommen, head of corporate & structured banking; Alasdair Robertson, head of corporate banking for West Midlands; Ranjit Gokarn, head of corporate banking for East Midlands; Robin Penfold, head of corporate banking for Buckinghamshire, Bedfordshire and Northamptonshire; Ian Seager, head of specialised financing.
Types of finance offered: Working capital, term funding, global payment, cash management, international trade finance, asset finance, vehicle fleet management, invoice finance, technology banking, treasury and derivative solutions, independent wealth management, MBOs, MBIs, acquisition finance, share buybacks, mezzanine funding, P2P buyouts, cross-border acquisitions.
Recent deals: The £31.8m MBO of Smethwick-based windows manufacturer KEB Fabrications in February 2004; senior debt and working capital in a £375m syndicated financing for Hayley Conference Centres
Bank's position on equity: "We are reviewing our options to consider whether we need to widen our product range to include an IF package," says Strommen.
Yorkshire bank
Corporate banking staff in Midlands: Forty-six business managers in 12 different locations across the Midlands supported by a network of specialist support (risk management services, asset finance, invoice finance and wealth management) and premium and private banking managers offices in the region. Midlands split into three regional structures as follows:
Offices: Birmingham, Wolverhampton and Hanley; Nottingham, Leicester, Derby, Mansfield and Peterborough; Leamington Spa, Coventry, Northampton and Luton.
Key individuals: Regional business managers - Warren Brett (west), Carl Dickinson (east) and Brian Colquhoun (south).
Types of finance offered: Full range of integrated financial solutions - money transmission, savings, investment loans, mortgages.
Recent deals: Radford Holdings (property and construction group) - £33m loan and working capital facilities; Thomas Long (Midlands-based construction group) - £31m term loan; Totom Plant Hire - £31.7m term loan for a property and working capital; Midlands-based landed estate - £320m property purchase and development facility.
Bank's position on equity: Yorkshire Bank does not have a standard equity-type product.
NM Rothschild
Corporate banking staff in Midlands: 5
Offices: Birmingham.
Key individuals: Paul Simpson, director, Simon Osmond, assistant director.
Types of finance offered: Senior debt, mezzanine debt, working capital, asset finance, property finance, invoice discounting.
Recent deals: Part of a £315m revolving facility package jointly provided with the Co-operative Bank for Warwickshire-based consumer debt recovery business Equidebt in January 2004; secondary buyout of Birmingham-based health, beauty and tampon business Accantia, sold by ABN Amro to Duke Street Capital in a £3225m deal in November 2003; £390m refinancing of Midlands van-maker LDV; £3190m all-share merger of service groups Mouchel and Parkman; £338m secondary buyout of motorcycle accessories group Frank Thomas.
Bank's position on equity: Not looking to go into that area.
Barclays
Corporate banking staff in Midlands: 500
Offices: Birmingham, Derby, Lincoln, Wolverhampton, Shropshire, Coventry, Worcester, Hereford, Leicester, Northampton.
Key individuals: Ian Tetsill, head of leveraged finance Midlands; Andy Martin, corporate director, larger business Midlands; Ray O'Donoghue, deputy corporate director, larger business Midlands; David Adams, deputy corporate director, larger business Midlands; Steve Clegg, director, Midlands property finance team.
Types of finance offered: Tailored packages, including asset finance and sales financing. Access to a range of Barclays Capital debt capital markets solutions. The leveraged finance team provides debt and mezzanine products to support acquisitions, buyouts, buy-ins, P2Ps and other finance for growth/expansion. The property finance team provides a full suite of debt, mezzanine and equity funding solutions to property clients.
Recent deals: Nottingham-based car dealer Pendragon's recent acquisition of rival CD Bramall for £3230m early this year; last year's secondary MBO of Nottinghamshire-based Frank Thomas Holdings, the UK's largest distributor of motorcycle clothing and accessories; the acquisition of Kingswinford-based snack and ingredients retailer Julian Graves by retail investment group Baugur in February 2004.
Bank's position on equity: Can team up with Barclays Private Equity or Barclays Ventures for a one-stop Barclays solution. "We have a lot of VC relationships on the leveraged finance side and are keen to work more with them," says Tetsill. "We don't want to be competing with them for new deals."
Alliance & Leicester
Corporate banking staff in Midlands: one regional manager, one senior lending manager, 11 business banking managers around the region.
Offices in the region: Carlton Park, Leicester.
Key individuals: Stuart Wilson, regional manager; Nick Pulley, senior lending manager.
Types of finance offered: Overdraft, term loan facilities and main contact for asset finance, factoring and international payments.
Some recent deals: Affinity relationship with National Pharmaceutical Association launched in April.
Bank's position on equity: Not currently and no plans to offer such a product.
Lloyds TSB Corporate
Corporate banking staff in Midlands: Four relationship directors, each with a team of 28 senior relationship managers below them. Four directors in acquisition finance.
Offices: Birmingham, Dudley, North Staffs, Leicester and Nottingham.
Key individuals: Directors in acquisition finance Mark Bolshaw, Martin Cordey, Andy Taylor, Paul Whitehouse. Relationship directors Roger Galbraith, David Richardson, Mark Brotherton and Keith Hardy.
Types of finance offered: Loan, overdraft and mezzanine finance to fund changes in business ownership including MBOs, BIMBOs, acquisitions and cash out. Can team up with other Lloyds TSB specialists.
Recent deals: MBO of Lichfield-based Autosmart International in February 2004; £367m BIMBO of retail systems business Torex Retail in February; Stratford-based Graphicraft's acquisition of Omnigraphics Industrial of South Africa in January.
Bank's position on equity: Has its own private equity arm, LDC.
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