Europe’s listed companies are wising up to the tactics used by private equity managers and applying them to their own business to avoid buyouts. One idea that is being touted by investment bankers to their clients is that of a “multi-layered” or “multi-pronged” corporate financing structure.
Bankers say that it is outdated to look at companies in terms of a single leverage number. And securitisation seems to be a revelation for CFOs and corporate treasurers used to developing overarching finance strategies to keep a company’s leverage low enough to preserve their credit rating. Of course bankers are not altruistic, this type of strategy produces lots of banking fees. But for those in need of protection, they are advising listed corporate clients to split their companies into ringfenced pools some of which are borrowed heavily against while others are untouched. And companies are already putting the strategy into play. EMI, the UK music company, is securitising its music publishing rights and UK retailers such as Tesco and Sainsbury are unlocking value from their property companies by ringfencing them from operating companies in the so called “opco-propco” securitisation.
The thought is that debt is less scary to a ratings agency, or board of directors, if it involves just a part of the company rather than the whole. Leveraging certain assets, even partially, can give a company protection against a private equity bid as ringfencing assets and borrowing against them can reveal their hidden value to the stock market. It also removes one of the routes for unlocking value that a private equity house takes when it buys a listed company. However, the multi-pronged approach can still raise leverage in a way that may weaken a company’s fundamental health. Debt is still debt, despite the securitisation lexicon.
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Cartoon by Anthony Garner aka ‘Ant’ – a regular contributer to EVCJ.