New forms of finance will drive UK’s growth

THE need to restructure corporate debt and find new sources of financing is germinating a new breed of so-called “equity solutions” that, it could be argued, will be absolutely vital to the UK in the next year or so as we get to grips with the new economic environment.

According to a report from City law firm Berwin Leighton Paisner (BLP) published ahead of this week’s emergency Budget, these innovations are driving growth as equity providers respond to renewed demand from companies for financing that is both difficult to find and costly.

It once again highlights the creative potential of the City of London with alternative lenders including hedge funds, private equity firms and large investment funds starting to offer debt for equity funding. It represents a handy alternative to rights issues and initial public offerings when it is tough to win support for such traditional fund-raising mechanisms.

Nevertheless, BLP’s Driving UK Growth report notes that the major force behind corporate financing in the short term will be the need for companies to restructure their debt packages – a view which echoes that of this column two weeks ago.

Tamara Box, head of international structured finance at Berwin Leighton Paisner, says: “Major corporates and their financial institution lenders are under enormous pressure to amend and extend current debt packages against a backdrop of continuing liquidity constraint which means that the options available for refinancing are painfully limited.

“However, the credit crisis is stimulating innovation by the debt and equity markets alike and as a result we’re seeing new sources and forms of debt and equity emerging that are helping to rebalance the pre-crisis dependence on cheap debt and meet the need for finance to support growth as the UK economy recovers.”

The research found a third (33 per cent) of those surveyed believe the need to restructure debt will be the major driver of corporate activity in the coming 12 months. And equity rather than debt will be the most popular form of raising finance for corporates over the same period according to 61 per cent of respondents.

The main hurdles to all this growth, the BLP report argues, are impending regulatory reforms that could damage the UK’s competitiveness. In interviewing 50 senior executives from blue chips and major financial institutions, BLP found regulatory reforms were one of the biggest causes for concern.

Yet days after the report was published, big changes to the way banks are regulated were announced by George Osborne in his Mansion House speech which will see more powers handed to the Bank of England. On top of that we saw a new bank levy included in the chancellor’s Budget which will see a £2bn tax on banks’ balance sheets – another unpopular move with the BLP respondents.

Let’s hope the new measures do not make those worst fears come true.