Corporate Deal Case Study – UCG

by | 10 Mar 2020

Working Capital Growth Funding for Universal Communications Group Ltd

UCG is a Multinational Corporate based in Australia, with HQ and operations here, along with operations overseas, particularly NZ. Driven by their industry-leading delivery quality & service standards, along with continuing rapid advancements in technology that demand ever-increasing data transmission loads (just think about how much online data you use at home & work now, compared to only 5 years ago!), the company has experienced impressive growth and is expected to continue doing so in the coming years.

In the current banking environment however, wherein banks have become increasingly conservative – particularly for true cash-flow lends (i.e. with no tangible assets as security) – UCG found it difficult to fit within the appetite of the Australian banks.

“Prior to engaging STAC, our business was experiencing some challenges funding the significant growth we were experiencing, predominantly from our New Zealand based operations. Our existing facility provider found it difficult to continue to support the business as they did not have exposure to NZ and we were struggling to find a suitable and willing lender to fund our continued growth and overall operational funding requirements.”

This challenge was further compounded by the fact that UCG are very much a niche player in a very small industry sector, which is not well known or understood by most bankers. Furthermore, the nature of the workflow and balance sheet accounting treatment meant that their funding requirements didn’t fit neatly within any lenders’ boxes.

Having already pitched directly to the banks unsuccessfully, UCG’s expectations were that STAC’s role would be to canvas the Alternative Debt Capital Markets, to structure and negotiate a non-bank debt solution.

A few quick points about alternative/non-bank debt for business & corporate borrowing:

In almost all cases, debt funding from sources other than normal trading banks will carry a price premium.

For corporate & institutional borrowers that are seeking debt tranches of $50m or more AND that have very strong financial positions, this premium can be relatively small and quite attractive, particularly when considering the fact that these debt structures tend to be “covenant light” and can have longer tenors (loan terms).

However, for borrowers seeking smaller loan sizes and/or have financial attributes that put them outside of banks’ risk appetites, the price premium can become quite high – thereby having a direct impact on the bottom line.

There’s generally two primary reasons that this price premium would make sense:
(1) you need the funding to survive and you don’t have any choice but to pay the premium, or
(2) the benefits that might be able to be achieved by accessing the capital (e.g. to make an acquisition that will deliver immediate additional profits) outweigh the additional cost of the capital; put simply:

Would you be happy to pay an extra $1m a year for your finance,
if it unlocked your opportunity to make an extra $2m in profit?).

STAC’s Approach

The start of our scope was definitely not what a typical finance broker would start with. Given the complexity of the business, combined with the fact that the industry it plays in would not be well understood by any prospective bankers/lenders/investors, prior to jumping into “solution mode” or even talking to anyone in the market – we invested time into undertaking a “deep dive”. 

“STAC’s thorough investigation and research ensured they had a good knowledge of the industry and our company’s role in it. This allowed them to ensure that the right finance partners were approached that would achieve the best fit and outcome for all.”

Off the back of this, we prepared a highly-detailed IM (Information Memorandum) of some 60 pages, including a full “Industry & Business Briefing” as well as everything else that a banker or debt investor wants to see, including exactly what was being proposed and analysis of the financials & key risks (i.e. why it’s a deal!).

Having undertaken this significant amount of research and analysis, we were of the view that the view that:

  1. the sought funding would not fit within any banks’ policies or products neatly and,
  2. the gearing sought (on a Debt/EBITDA basis, the most commonly-assessed metric in corporate banking) based upon historical financials would be beyond banks’ risk appetites.

Many in STAC’s position might therefore consider that the deal would not be “bankable”. However, we had a degree of confidence that – by engaging the right Corporate Bankers AND by taking the time to work through a strategic deal negotiation process over a period of a few months (the story of the Hare & the Tortoise can undoubtedly sometimes be applied very effectively in banking & finance) – that we may be able to get a bank across the line.

STAC has successfully achieved approvals with banks on multiple occasions in the past, where clients’ own direct approaches had failed, by applying our defined strategic approach, combined with our experience and capabilities.

Read more about What to Do when you get Declined

Outcomes Achieved

After having run a strategic process over a couple of months, multiple credit-endorsed terms sheets were successfully obtained, including from major banks and institutional-grade fund managers. Whilst the latter came at a reasonable price premium (not massive, but also not immaterial), it did deliver higher borrowing capacity.

Ultimately though, management decided that the additional borrowing cost did not provide sufficient benefit to the company, relative to what the company could achieve by using the banking options on the table.

Focussing on the major bank options on the table, it was clear to all that there was one clear front-runner – based not upon pricing, but on the terms proposed.

Whilst management were ecstatic about the result achieved to this point, we at STAC remained cautious, living by the sayings “the devil is in the detail” and also “the deal is not done ‘til the money is in the bank”!

So, rather than taking the quick win, we continued to invest time and effort into further negotiations… Fine detail such as covenant metrics, specific wording of covenants & conditions, security structures; oh and a bit of final price squeezing!

STAC has successfully negotiated a new facility with one of the largest mainstream banks, that not only meets our previous facility, but exceeds it in terms of flexibility for future requirements.
Without STAC, I believe this would have been difficult to achieve as we had researched the use of other companies or negotiating with potential lenders ourselves and we had not had any success.
This changed when STAC took on the project.

The final outcome for UCG, was a formal approval (and subsequently quick settlement) with the major bank, on terms that far exceeded what was ever expected when STAC was initially engaged.

Not only will this result in a significant on-going cost saving, but it also provides funding certainty and clear boundaries for them to continue growing the company in the years to come.

“We are very happy and satisfied with the service STAC has provided and we are engaging with them on an ongoing basis to ensure that they are abreast of the direction and future needs of our company. From the outset STAC have provided a personal approach to the engagement. Being a smaller company, I believe is a great advantage that STAC has on other firms as they are able to focus on your particular requirements and structure their offering accordingly.

I did not hesitate to engage STAC, given I knew the calibre of the STAC team and the effort they would exert to achieve a successful outcome; I would not hesitate to recommend STAC to anyone requiring their services. Their attention to their customer’s needs, their commitment to the end goal to be achieved and the efficient manner in which they engage with management has made them a pleasure to work with.”

Ralf Luna, Chairman & Founder, UCG Group

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *