Wheelhouse, Security & Runway: The Real Deal
News Flash
Hermes Capital provides solutions to the working capital constraints that businesses face when they are trying to grow, re-structure, re-align or refinance.
We provide funds from $500,000 to $10 million, and for our debtor finance clients, have the unique capacity to provide term loans secured by equipment and/or property.
The capital Hermes provides comes with the right structure, in the right quantity and at the right time to give our clients the decisive fire power they need to achieve their goals, as highlighted by the case below.
Transitional Situation
In December, Hermes was asked to fund a mining services business with a funding requirement of $6 million, comprising $4 million in term debt and $2 million in debtor finance, for a 12-month period over which time the business would be “turned around”.
Hermes applies three key criteria when assessing a funding opportunity, as this month’s case study illustrates. The three criteria can be summed up in three words: wheelhouse, security and runway.
The gap in the market for commercial finance
Firstly, Hermes assesses if the opportunity is in its “wheelhouse”. This includes considerations such as whether:
- the opportunity is of sufficient size ($500,000 to $10 million)
- it is an asset-based lending opportunity with a debtor finance requirement of roughly 50% of the overall requirement; and
- it is a medium-term funding opportunity (Hermes funds deployed for at least 12 months).
In this instance, the client had engaged safe harbour/business turnaround experts who had drafted a 12-month turnaround program, however, the bank had grown too impatient. The plan included the sell-off of some redundant assets in the initial three months, meaning roughly $3 million of the Hermes term debt would be retired early, leaving the debtor finance portion of the combined facility at a level acceptable to Hermes. Hence, the wheelhouse requirement was met.
Asset-Based Lending Solution
As an asset-based lender, our second criteria is “security”. Primary security for debtor finance is always debtors of course. Term debt can be supported by equipment, property, or a combination of both.
In this case, the debtors included a mix of “progress claim” debtors and a ledger that was concentrated (a typical scenario in mining services). To support the term debt, there were four properties (two first and two second mortgages respectively) as well as a fleet of yellow goods and transport equipment. The valuations on the equipment and property were sufficient to support the term debt requirement and ameliorate the progress claim risk. As such, the security requirement was met.
The third criteria is “runway”. After the immediate funding requirements have been met (e.g. refinance the bank, pay ATO arrears etc.), Hermes evaluates whether there will be a sufficient surplus of cash available to the business to ensure that the ongoing strategic and operational requirements will be met. The cash “runway” needs to be long enough to facilitate a viable “take-off” post settlement.
This particular instance saw the client’s banking relationship transferred to the “loans management” division of its bank, with the client placed on an “exit” path. The client had property it could sell to reduce debt but wanted to manage this process effectively in order to maximise sales outcomes instead of having the bank instigate “forced sales”.
The property and equipment available were sufficient to support a term loan that paid out the bank. The adjunct debtor finance facility provided “fresh” working capital that was sufficient to support the business into the medium term as asset sales were realised. Ultimately, the “runway” criteria met.
Outcome
Overall, the outcome has been positive in that the client has been able to execute the initial stages of its turnaround plan, given the time and working capital now made available to it–courtesy of the new funding arrangements.
The turnaround plan included the implementation of a succession plan, now underway. The business is tracking to plan.