Performance Bonds
Before undertaking a change of control, companies that frequently procure surety bonds should consider the effect that the transaction might have on their surety bond facilities. In this five minute blog post Henry Robbins highlights the information that will be required post transaction.
It might seem negligent to consolidate all the aforementioned transactions into a single blog post, and such an assumption would be understandable. However, although each transaction is distinct and possesses its own set of unique features, the role of the underwriter and the core principles of underwriting do not change. In every case, the surety provider’s paramount objective is consistent: to thoroughly comprehend the risk being assumed and the prospective future risk profile of the business.
Each of the above transactions changes the risk profile of a business to some degree and therefore each creates a trigger event for a full underwriting assessment of the business, regardless of the financial strength of the business pre-transaction. In some cases, it will strengthen the risk position of a business from an underwriting perspective and in some it will weaken it. By virtue of that, any of the above transactions will impact a company’s ability to procure to bonds and the price at which they are able to do so, for better or worse.
The aim of this blog post is simply to outline the initial suite of information that a company should produce to deliver a robust submission to the market and we will highlight some of the key considerations from an underwriting standpoint. We have provided the base level suite of information below and clicking on each will provide a brief explanation of the requirement. In the surety market, the more robust a broker’s submission, the greater the likelihood of obtaining favourable Terms in terms of both pricing and the capacity extended.
Surety Underwriters’ Due Diligence Requirements Post-Transaction:
Explanation of the rationale behind the transaction
Self-explanatory but critical nonetheless. The detail required is simply for the underwriter to understand the motivation behind the transaction from both parties’ perspectives and specifically why Management has opted to pursue the transaction inclusive of the perceived benefits of the transaction
Post-transaction Consolidated Group Balance Sheet
This is required so the underwriter can understand the financial make up of the business post-transaction, the strength of the business and its ongoing obligations. The key things they will be looking at are the Net Worth of the business post-transaction, the overall liquidity of the business inclusive of the Cash position and the amount of Cash that has been extracted as a result of the transaction, and the make-up of any debt funding, loan notes, Directors’ loans and ongoing repayment obligations inclusive of their associated Terms. The Sources/Uses of Funds summary and the formal Agreements (Share Purchase Agreement/EOT Deed) assist with this.
Details of the Sources and Uses of Funds
It helps if we are able to clearly demonstrate to the underwriter the origin of the funds that enabled the transaction and how they have been applied.
Share Purchase Agreement (“SPA”) / EOT Deed
We completely appreciate that these documents are sensitive and highly confidential and so it is paramount to our successful relationships with our clients that we treat it as such. The underwriters are also aware of this and treat all information in the strictest confidence. They require sight of the SPA/EOT Deed to ensure they fully understand the transaction and its implications and obligations on the business to enable them to fully assess their risk in relation to the future business. The key things they will be looking for are the repayment obligations under the documents, the shareholding pre- and post-transaction and the degree of involvement of those shareholders alongside their experience, which feeds into the below requirement for an overview of the changes to the Management Team.
Overview of Management Team Pre- and Post-Transaction
Every business is shaped by its Management Team and the success of any business lies within the competency and decision-making ability of its Management Team, hence the need for the surety provider to understand who makes up the Management Team, their experience and the degree to which they have day-to-day involvement within the business. They will require an overview of the individuals included in key senior positions both pre-and post-transaction highlighting the changes within the Senior Management Team. The typical roles they require information on are the Chairperson, Chief Executive Officer, Chief Financial Officer, Group Managing Director, Group Financial Director and Group Commercial Director albeit that list is not exhaustive and will clearly be different between businesses – essentially we need an overview of the Board pre- and post-transaction alongside a brief bio outlining their experience and credentials both individual and collectively, i.e. have they worked together previously and to what degree of success.
A full overview of the Repayment Terms/Obligations and a copy of the associated formal Agreements
The surety providers need to understand the likely impact of any repayment obligations on the future business. The Cash position is key alongside an understanding of the working capital cycle and the minimum amount of working capital required to operate, hence needing to understand both the quantum and the nature of any repayments, i.e. how are any repayments structured, are they fixed repayment amounts with strict repayment dates, is there a fixed expiry date/date by which all amounts must be repaid, are the amounts outstanding interest bearing, are repayments linked to performance or trigger events and what are those?
Financial Forecasts (P&L, Balance Sheet, Cash Flow) to the end of the current financial year and next financial year.
All of the aforementioned information is why the financial forecasts are considered critical to an underwriting decision, so that we are able to demonstrate to the underwriter that the business can absorb any additional costs and accommodate any repayments without impacting its long terms viability as a going concern. The Cash Flow Forecast will need to illustrate the impact of any repayments on the Cash position of the business throughout the year(s).
What should you do before considering a business sale via an EOT, MBO, PE or Trade Sale?
Contact Henry Robbins on 07944883053 or via email at [email protected]
For a no obligation discussion.