Last year was populated with announcements of debt refinancing exercises across the waste industry.
In these challenging times, refinancing is a pretty common feature of the industry among large and small businesses.
In a typical refinancing, a company will extend the life of its existing loans or change the repayment schedule in exchange for a fee. It may also choose to replace the loan with entirely new borrowings. In circumstances where trading has materially changed in the business or it is likely to breach its covenants, it will also be necessary to go through a refinancing.
At this time last year, for example, FCC Environment UK refinanced £381m of syndicated loans, extending the maturity by four years. The syndicate included 16 international lenders and 10 Spanish banks.
Shortly afterwards, Shanks agreed a five-year revolving credit facility of €180m (£139m) with seven major banks, refinancing its existing bank facility, which was due to expire in June opinion 2015. These were clearly complex processes, which absorb many months of negotiations, management time and, no doubt, advisers’ fees.
Last month, the major creditors of Van Gansewinkel, the beleaguered Dutch waste management group, were understood to be negotiating with shareholders on how to restructure their debt after a sales process for the company had failed.
According to recent press reports, GSO, a subsidiary of Blackstone, and Alcentra, two of the 50-odd creditors, are currently leading negotiations. Possible solutions are understood to range from deferral of interest payments to complete debt-for-equity exchange. Alternatively, shareholders could be required to inject more equity.
It is not just the larger businesses in the waste and recycling sector that need to refinance. Hazardous waste company Augean completed a £15m refinancing package backed by HSBC. And New Earth Solutions announced a major refinancing of its Avonmouth energy recovery facility, which included securing a new debt facility from Macquarie Bank of £20m.
Many privately owned businesses we work with in the sector often require support on refinancing existing loans to ensure that they match cash flows and provide operational headroom for the business. In a capital-intensive business like waste, this is an ongoing process.
While refinancing with existing lenders or other high street banks may be the most cost-effective option, in terms of interest margin and arrangement fees, there are an increasing number of options available to businesses, often with more flexible approaches to loan amortisation.
Many companies and financial sponsors (private equity) are now relying on the bond markets or the non-bank loan market either to refinance existing bank debt or raise new facilities.
For smaller companies, the bond markets, by virtue of constraints on size and credit quality, cannot cater for all players so other established forms of non-bank and alternative bank lending remain their only source of finance.
The good news is that the strength of liquidity and appetite to lend which is prevalent in the bond markets is also being seen in these private loan markets. New specialist funds are competing directly to replace bank debt as a core medium to long-term lending option for the mid-market. The chart shows the expansion across Europe in these lending sources.
Bank capital will clearly always have a place in the waste financing tool kit. But for the first time in Europe, mid-market companies and financial sponsors have the same number of financing options as their larger peers have had for many years.
We expect to see a great range of lenders involved in the waste industry during the next five years or so.
Mark Wilson is a partner and Head of Waste & Renewables at Catalyst Corporate Finance