Transactions Blog

2008 and 2009 are challenging times for the M&A market due to the lack of available funding. Many investors and international groups are looking for cost-cutting opportunities and cash optimisation.

During the 5th session of our M&A Academy, we tried to evaluate how reshaping your conventional business model towards a more flexible structure can help you in for example the improvement of your business model or the optimisation of your tax credits and/or cash position.

Since business restructurings trigger multiple tax issues, not only transfer pricing aspects, this module also focused on the following aspects:

• the arm’s length risk allocation to restructured group entities;
• the potential ‘exit charges’ and indemnifications upon restructuring;
• the recognition, by tax authorities, of restructuring transactions.

Download “Tax implications of business restructuring”

More info about the M&A Academy season (programme, registrations, etc.)

The recent financial turmoil in many ways might have affected family owned businesses. Be it through the exposure to further specific industry issues/downturn due to a lack of diversification of the family wealth or be it because the available financial reserves have suffered significantly, e.g. due to operational and/or financial losses incurred or working capital surges.

In addition, the Trends Top 30.000 survey showed self-financing of companies in general at its lowest over the last 3 years (2008). While the reasons and sources thereof can be quite diverse (lower profits, more distribution or increased liabilities), self-financing might still be further hit by the effects of the economic crisis in 2009 (and …2010) and this at a moment of increased need of finance. Demand for financial resources is therefore likely to increase in the mid-term (even if funds are available within the company – cfr. Trends Top 30.000, ‘Loans to safeguard savings’ in 1 out of 4 companies).

Any given family business therefore needs to ask itself the existential question on how to continue. Whether it is its ambition to do so on a fully stand-alone basis (and whether from a financial/wealth point of view it is capable to do so), whether (temporarily) a certain level of external capital is required or whether the family wants to sell its business. Even in the first scenario, it is highly likely (and recommended) that the family diversifies its activities and hence is likely to make divestments/acquisitions. Needless to say that in the other scenarios, family businesses are likely to bring new oxygen to the M&A market in the mid-term.

The final quarter of 2009 saw encouraging signs of confidence returning across a broad spectrum of bank lending. The mild softening in pricing and the lengthening of tenors in the corporate market, a cluster of new leveraged buyouts at the end of 2009 and the re-entry of banks into the commercial property market (on a selective basis) all presage a more active banking market in 2010.

Corporate lending – There are signs of increasing confidence in the corporate lending market reflecting a slight softening of pricing, particularly on larger deals and the extension of tenors to four years in some instances. Lenders are also more willing to consider financing a new borrower where there has been a resilient track record through the recession and prospects are attractive. There are initial signs that banks are beginning to consider taking material underwriting positions; a key milestone in the return to a more normalised market.

Leveraged finance – 2009 was the quietest year for over a decade in the syndicated leveraged finance market. However, there was an uptick in activity in the fourth quarter and the pipeline for new deals is encouraging. Whilst the market is not about to accept a surge in highly leveraged, thinly priced deals, a gradual improvement in lending conditions is realistic.

Corporate Bonds - For larger borrowers, the bond market filled the vacuum left by the contracting bank sector in 2009 with UK issuance up 12% year on year. Investor appetite also helped put pressure on bank pricing for large corporate refinancings. More borrowers could consider tapping the capital markets to diversify their lending sources (as well as lock in longer term debt).

Property finance - The sector has been one of the worst hit by the credit crunch. Lenders have generally been supportive of overleveraged credits where the borrower continues to service its debts, but take more robust positions where there is a new money requirement, in some cases taking material equity positions. There are an increasing number of lenders offering debt for new deals, but the level of available leverage will leave a significant funding gap on those deals with upcoming bullet maturities, which suggests there will be a significant amount of restructuring activity in the next 2-3 years.

Restructurings - The second half of 2009 saw a reduction in the number of borrowers commencing formal restructurings. However, there will continue to be a steady stream of borrowers seeking a renegotiation of their debt facilities over the medium term. Quite apart from the anaemic macroeconomic backdrop, companies that were the subject of leveraged buyouts in 2005-2007 face tightening covenant levels over the next 18 months.

Today, more than ever, effective tax management is key in case you are dealing with situations such as:

-        determining a bid price in an acquisition process;

-        reallocation of existing bank debt and intercompany debt;

-        reorganizing your current group structure;

-        understanding  the impact of taxes on your cash position;

-        a complex supply chain with multiple countries and entities;

-        valuation of deferred tax assets;

Effective tax management can result in decreasing the effective tax rate, maximising the use of available tax assets, optimising the existing leverage, improving the cash flow and reducing compliance costs.

Modelling your taxes helps you to better understand, anticipate and further optimise your direct and indirect tax charges and to obtain an improvement of your working capital based on your business plan.

Depending on your needs, such tax model can provide you a fair and better understanding of the tax impact of maintaining your current group/financing structure as opposed to implementing alternative scenarios, allowing you to decide on such restructuring/refinancing scenarios in a more informed manner.

…Hence, tax modelling is an indispensable aspect of financial management.