As we come to the end of a torrid year, business leaders in the north-east’s oil and gas industry breathed a collective sigh of relief on news that coronavirus vaccines look imminent. Oil prices rose around 8% globally following news that three Covid-19 vaccines both showed high efficacy and will be available next year.
In the short term, however, supply still exceeds demand, particularly across oilfield services. A number of players in this market are at the tail end of contracts finishing during the first half of 2021, with a restricted, in some cases non-existent, pipeline thereafter.
Furthermore, 2021 will, barring a U-turn or extension, see the end of the coronavirus job retention scheme. This will come before oil demand has had a chance to substantially increase. Government loans have been welcome, and undoubtedly prevented many insolvencies, but those schemes close in January. Businesses which took out a facility over the past year will need to start repayments, in addition to settling any tax bills deferred due to coronavirus.
HMRC has been agile and accommodating during the pandemic, but that too may change. As of December 1 it regains its status as a preferential creditor during insolvency proceedings. That will affect traditional lenders’ appetite for risk, with outstanding tax liabilities priced in.
For many, there is a sense that the can has been kicked as far down the road as possible. The New Year will inevitably bring cash pressures.
During 2020, companies that have required funding, or a little more flexibility, have been advised to approach existing lenders. And this is likely to remain a sensible starting point for any funding need, particularly given the need for new lenders to undertake detailed diligence in a volatile market: better the devil you know in most cases.
However, in some cases, existing lenders may not have the capacity to further extend credit lines, prompting corporates to consider alternative sources of funding.
While banks remain vital lenders to the UK mid-market, alternative sources including debt funds, asset based lenders (ABL) and private equity should not be ruled out.
Debt funds can provide facilities with higher levels of leverage, greater flexibility on amortisation profiles, more headroom on financial covenants, and higher individual ticket sizes. Such facilities will likely come at a higher cost.
ABL facilities extend beyond the traditional invoice finance. It is possible to add in other assets to create a much larger borrowing base, generating higher leverage than cash flow based lending.
Private equity, for its part, is well suited to support growth and exit ambitions of management teams during what is likely to be a year of consolidation and change in the energy supply chains.
There are numerous funding routes for CFOs to explore. Taking stock of all of the options will be critical to the survival of some businesses, and the growth of many more, during 2021.
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