Taking Advantage of Today’s Market Rates: Why Now is the Right Time
Fears of global recession hit markets hard at the start of the year, but have seemed to diminish slightly with central banks in key oversea markets continuing their quantitative easing measures to stave off recessionary tendencies in their home markets and the Federal Reserve (the Fed) holding interest rates steady. Although markets abroad and domestically have somewhat stabilized, global economic and financial backdrops are still looming. With a presidential election year upon us and disappointing U.S. GDP growth of an estimated 0.5 percent during the first quarter of 2016, the economic environment remains unpredictable. Anticipating macro-economic trends and taking advantage of the current economic environment, specifically one of continued low interest rates, may help your business position itself to withstand uncertainties ahead.
Recent volatility in the overseas and domestic stock markets, early signs of tightening in the U.S. credit markets and political uncertainty have many business owners guessing what tomorrow will bring.
Many economists are forecasting that the Fed may increase the federal funds rate, currently at 0.5 percent, once or twice yet this year in 0.25 percent increments. The first likely increase may come in June followed by a subsequent hike in December. While economic data and projections may certainly influence the Fed’s decision as to when it may effectively seek to further increase the interest rate level, either in June or December, the overall market consensus is that the Fed’s strategy continues to be one of pursuing a monetary policy of tightening money supply to increase tools at its disposal, which will consequently reflect an increasing interest-rate environment.
Besides elevated credit costs on the horizon, lending standards are beginning to tighten as well as of recent, with a reported increase of 4.2 percent for the first quarter of 2016, the highest since late 2009. This may have immediate ramifications to your business that you want to consider. Lending standards for commercial and industrial loans to small firms, in general, provides a gauge of accessing bank loans capturing domestic banks’ guidelines to underwrite loans by capturing overall credit terms and conditions. Should the trend continue, which began during the fourth quarter of 2015 with a reported increased lending standards of 1.5 percent, implications on credit availability should be considered as you review your business plans for 2016 and beyond.
Consider Refinancing or Recapitalizing Your Business
In lieu of the current state of the credit markets and anticipation of possible capital needs, in many cases, now may be the perfect time to take a closer look at your capital needs and structure while interest rates are still low and before lending standards tighten further. As a best practice every business should review their financing terms and options quarterly, or at a minimum, semi-annually.
Depending on when you last revisited or reviewed your business’ capitalization, refinancing your debt or recapitalizing your business can provide a competitive advantage by reducing the cost of capital, consolidating debt facilities or tranches, optimizing your capital structure or by securing the necessary liquidity for future capital or debt needs.
Doeren Mayhew Capital Advisors have outlined a few reasons why now might be a good time to consider refinancing or recapitalizing.
Recapitalization and/or Refinancing
Depending on the business owners’ objectives, a recapitalization may be advantageous and favored over refinancing which leverages off an overall favorable credit market. Specifically, credit market access at favorable terms and costs has positively influenced business valuations and contributed to increased M&A transactions, both in terms of value and number of transactions. The M&A market itself has experienced a slowdown during the first quarter in 2016, and tightening lending standards combined with higher credit costs, may negatively impact business valuations.
Low Interest Rates
Many companies wait until they need capital to review and assess their capital structure to determine possible needs, leaving them potentially vulnerable to higher rates and less favorable terms depending on the market environment. Interest rates remain low, however are expected to rise in the mid- to long-term future. Refinancing or recapitalizing now will lock in today’s rate and help reduce your company’s risk of needing to refinance at higher rates and pay increased loan costs.
Competitive Loan Market
While lending standards are tightening, the loan markets remain competitive. As such, many lenders continue to offer very competitive rates and deal terms. Refinancing now can allow you to exploit favorable credit terms and credit costs at lower interest rates.
Funding Source Alternatives
Market volatility and reduced returns on investment in the equity markets has led to significant allocation of capital towards the middle market. Hence the number of capital providers or funds devoted to it has and continues to increase in the United States. Besides senior debt, these providers offer junior or unsecured debt, convertible debt, mezzanine and/or equity financing. While these providers may not be opportune or competitive with traditional banks when pursuing to refinance senior debt only or simply a strict reduction in costs, they may offer alternatives when considering different objectives and striving to optimize the capital structure via recapitalization.
Amplified Cash Flow
By anticipating capital needs or by reducing overall credit costs, the additional capital or reduced expense may be re-invested in the company, facilitate growth capital spending projects or absorb temporary business slowdown.
Each business situation and transaction is different and many factors need to be considered when determining to proceed with recapitalizing your balance sheet. However, timing the pertinent market cycles is critical when making those decisions.
Getting the Right Terms in Place
Regardless of if you are looking to position your business to grow, anticipate future capital needs, or just have not reviewed your capital structure and its terms, now is a good time to evaluate your options. Contact our investment bankers to help assess your capital structure or needs, along with the associated returns and costs.