Prototype of a Financing Process

To continue the fourth principle of a financing strategy, a prototype or template for a financing process has been developed. Figure 7.2 displays the phases as well as core processual steps.

Figure 7.2: Phases of a Financing Process

Source: Own illustration.

Negotiation of offers

Fixing of conditions ahead of final contract awarding

Negotiation of documentation

Signing

Fulfilment of conditions precedent

Funding

Distribution of information package to potential financing partners

Management presentation or Q&A sessions

Review of received indicative term sheets or proposals

Recommendation for preferred solution (s)

Preparation of information package (business plan, annual reports, loan book, indicative term sheets)

Formulation of an invitation letter

Shortlisting of financing partners to be provided with information pack

Preparation of management presentation for Q&A sessions or roadshow with potential partners

Identification of financial goals and priorities

Determination of approach and timing based on conditions of financial markets

Definition of appropriate depth information provided during the process

Consideration of existing relations with banks and investors

Identification of appropriate banks and / or investors to address during the process

I. Analysis of financing markets

and determination of approach II. Preparation

III. Market approach and dialogue

IV. Negotiation and documentation External phase: Approach, negotiation and documentation Internal preparation phase

7.3.1 Internal preparation phase

The developed financing strategy typology showed that not all three types are concerned about an internal preparation phase. However, consistent planning and a market assessment would have helped in executing a process without the investigated interruptions and delays.

Analysis of financing markets and determination of approach

The first step in preparing for a financing decision is to identify the goal and priorities to be achieved. This links to the elements and determinants of the financing strategy. After this internal assessment, an external market assessment could be considered to detect which financing might be suitable in current market conditions. Following these investigations, the information requirements by potential financing partners should be assumed and mirrored with available packages based on the implemented information systems. The last step is the determination of potential financing partners that seem suitable to the company and its financing needs. This determination involves an assessment of the existing relations with banks and investors.

Preparation

The second step relates to the preparation of the documents that are required during the financing process. In a pro-active approach, a request letter should act as a cover for the documents provided. This request letter should outline the intended financing purpose, envisaged structure and core milestones to comply with. Financing partners should indicate, if they see any obstacles in meeting the milestones. The shipped documents should include a comprehensive set of information to allow a potential financing partner to perform an internal risk assessment. Latest annual reports and the current business plan of the company are mandatory, if not already provided to existing lenders. Market and industry surveys could be added to help potential financing partners to back test the business plan. A helpful tool could be the preparation of a ‘loan book’ or ‘bank memorandum’ that compiles all relevant company, market and financial information as well as details on the planned financing.

7.3.2 External phase: Approach, Negotiation and Documentation

The second phase starts with the communication to potential financing partners. It further involves the complete selection phase as well as the negotiation and documentation process until the funding of the instrument.

Market approach and dialogue

The shipment of the information package and probably a prior introduction call with potential financing partners, kicks-off the external process phase. After the review of the submitted information, financing partners typically expect a communication platform with the company to answer questions that occurred, receive more insights on the business and the strategy and to get a feeling for the capability of the management team. Such a platform differs amongst financing instruments and investors. For example, in a bank loan financing, the management typically holds a personal bank meeting with the leading bank(s) and performs a management presentation. On the other hand, a more debt capital market oriented product like the placement of a Schuldschein normally requires multilayer communication. It starts with a personal meeting with potential lead banks and their analysts. These analysts prepare a credit research that will be shipped later to the potential investors of the Schuldschein. In a second phase, a telephone conference is held by the company with potential investors or even a personal roadshow to core investors is undertaken. Following this communication phase, banks and investors are expected to submit their proposals and the management has to conduct an assessment process to select the appropriate solution. In many cases, the assessment reveals that the combination of several instruments will meet best the company needs. Therefore the indicative detailed timetable that is shown in Figure 7.3 includes a combined financing process by obtaining a syndicated bank loan in addition to place a Schuldschein.

Negotiation and Documentation

The last step in the financing process is the negotiation and documentation phase. Most of the delays investigated in this research happened in this last phase of the process (see section 5.3.4.2), except for starting too late into the process (see section 5.3.1). The phase contains the – sometimes intense – negotiations with the selected financing partners in particular with respect to the contract design and limitations included (see

section 5.3.6). A critical element is the careful preparation of the signing and funding process, in particular to coordinate all relevant parties to be involved. The detailed example financing process in Figure 7.3 highlights internal approval elements to emphasize the importance of combining the external process with the various situations, where internal presentations and approvals are necessary.

Figure 7.3: Exemplary detailed Financing Process

Source: Own illustration. Indicative timetable for a financing process

Phase Task

Development of the financing structure

Basic management decision on appropriate financing instrument(s) ▲

Compilation of list of potential financing partners Preparation of the information package ("Infopack") Development of indicative term sheets

Presentation of approach to the supervisory board and approval ▲

Shipping of invitation and Infopack to selected financing partners Proposals from financing partners (including terms & conditions) Analysis of bank proposals

Presentation of analysis and recommendations to the supervisory board ▲

Selection of preferred banks for the consortium Negotiation of terms & conditions Internal credit processes of financing partners Q&A sessions with analysts

Credit approval and commitment letter from financing partners ▲

Negotiation of financing agreements

Approval from supervisory board on final drafts of the agreements ▲

Signing of financing agreements ▲

Completion of last conditions precedent

Funding / pay-out of loan ▲

Selection of preferred banks for arranging the note

Negotiation of terms & conditions for the promissory note agreement

Approval from supervisory board on final drafts of the agreement ▲

Credit research - Analysis and Q&A

Credit research - discussion of draft versions and finalisation Bookbuilding phase

Credit approval processes of investors approached Roadshow/telephone conference with investors

Closing of the orderbook ▲

Presentation of potential allocation to the supervisory board and approval ▲

Allocation ▲

Pricing ▲

Funding ▲

= Process (1/2 week) ▲ = Milestone

30 31 Month 8 32 Phase 1 Internal preparation Phase 2 Request for proposal 27 28 29 Phase 3a Syndicated loan Phase 3b Promissory note 22 23 24 25 26 16 17 18 19 20 21 10 11 12 13 14 15 4 5 6 7 8 9 1 2 3 Month 7