Prospector Type: Case 1, Case 4 and Case 5

Strategic approach and organisation

Case 1 is a family-owned and operated company in the food industry with annual sales ranging between € 250 million and € 500 million prior to the refinancing. The company recently entered Asian markets and currently changes its product structure to respond to customer demand. Interview participants explained that the firm follows a financing strategy which is not formally written down in a single document. The financing strategy is included in several documents such as guidelines and memoranda. The strategy includes a core bank policy. A shareholder agreement excludes the ability to raise equity from external investors and limits the ability to sell equity outside the existing family.

Case 4 operates in the logistic manufacturing area. The company is family-owned and family shareholders are acting on top and middle management level. In the fiscal year prior to the refinancing, the company achieved annual sales between € 50 million and € 150 million. Both managers have no external job experience. The interview participants stated that the company does not have a financing strategy but is in no need for such a strategy, as the managers also represent the majority of the shareholders. Nevertheless, there are two limitating factors. Equity must be kept within the owner family which limits the ability to raise additional equity funds. Furthermore, the company aims to comply with the financial covenant that is included in the bank loan agreement.

The third case that has been assigned to the prospector type area is Case 5. Being an international manufacturing and engineering company with annual sales between € 250 million and € 500 million, Case 5 is operated by an external management team. The company implemented formulated financing guidelines for the group. These guidelines include a list of preferred bank partners to work with as well as key terms

and conditions to be considered in negotiations. The company planned an IPO back in 2002, but stopped the process as capital markets were not available at that time. Based on a proposal from one bank, Case 5 started to evaluate refinancing options 12 months prior to the maturity. This bank proposal preferred a refinancing via a midcap bond. The company invited several potential banks to assess market conditions and decided to execute the proposed midcap bond refinancing, combined with a new revolving credit line. The midcap bond was not used solely to refinance standard mezzanine, but also major parts of the existing senior bank loans. Even though interest expenses increased, the interview participants indicated that they were able to achieve contractual optimisation for the company. These optimisation items included the reduction of financial covenants to comply, the limitation of information rights for financing partners as well as to ease the repayment profile for the firm.

The three cases identified vary significantly in terms of formality of their financing strategy. But even Case 5 had a financing strategy in place that allowed to react quickly on new and innovative financing concepts. Case 4 – being a theoretical replication case – nevertheless showed flexibility as they were discussing to include individual mezzanine or even an external minority shareholder to mitigate their failed refinancing approach.

Main determinants and instruments

All three cases aimed to generate or enhance flexibility towards existing bank financing. It could be either achieved via optimisation of loan contracts or by exploring new funding sources. In addition, attractive conditions were amongst the frequently identified responses. The three prospector cases refinanced via a variety of funding sources and with several types of financing partners.

Processual consideration

Case 1 and Case 4 both aimed for a rather short refinancing process of six months and were both not able to complete the financing within that timeframe. Case 1 had to use a bridge loan from banks that afterwards provided the long-term refinancing via syndicated loans and an additional Schuldschein. The managers involved a financial advisor to support in the later negotiations. Major reasons for the delay were problems in generating the required information for the banks in time based on their various and

unconnected information systems as well as communication gaps between managers and shareholders.

Case 4 had to mitigate a more severe refinancing risk as banks were not able to support the refinancing based on the declining operational performance. One mezzanine provider extended the financing and the second mezzanine tranche was temporarily refinanced via a bank bridge loan. The management therefore used advisors to present alternative funding solutions and started negotiations with individual mezzanine providers. The inclusion of external equity was also discussed. This prompt adoption of their approach by involving alternative instruments, performance of a market assessment and the involvement of external advisors has been the reasons, why Case 4 is still seen to be more connected with a prospector typology and not as a defender. Their need for a bridge financing was primarily caused by a late start of the process that is related to the low degree of formality and the underestimating of the bank financing ability.

Financial Characteristics

The three assigned prospector cases included the strongest sales growth (Case 1), but also with Case 4 a firm with negative sales growth in the year prior to the refinancing. Profitability margins presented the largest spread compared to the other two typologies. This could be seen as an indicator for the focus of prospector types on gaining market share and competitive advantage through innovation and technology rather than to optimise cost-efficiency. The analysis of the cases further revealed more aggressive capital structure ratios in terms of higher leverage and lower equity ratio, but still with large spreads between the cases. These more aggressive ratios could be seen again in connection with the strive for development and innovation rather than to focus on efficiency and profitability.