It was always going to be a struggle. NewCo was a new business start up seeking to raise £30m to get going. The company had no specific experience in the sector it was entering, was privately owned and armed with only a business plan.
Well, maybe that’s underselling it a little. This was a small business seeking to build a specific type of plant with a site, planning permission, a good management team and suppliers all lined up.
NewCo didn’t want to sell off equity just yet, even if anyone was willing to invest the desired commitment of £30m. They were determined to raise the finance via a 20-year loan, possibly from a pension fund, to ensure long-term financial stability.
Over 12 months the directors met many different investment companies, pension funds and banks seeking support. Time and time again they were told it was a good business plan but the low credit rating of NewCo meant they simply could not commit.
The new venture simply didn’t have a strong enough credit rating, despite a great plan with clear and sustainable cash flow supported by government grants and other income sources.
So the problem was how to get the credit rating from a B (a highly speculative grade investment level) to a higher level.
Enter the commercial insurance market.
The thing about insurance is that it is a risk transfer mechanism. Purchasing insurance simply transfers risk from one balance sheet to another.
We structured a very detailed insurance programme around the erection risks (building the site and process machinery) and operational risks (running the business). In doing so we were (effectively) transferring risk from the balance sheet of NewCo to the balance sheet of a AA+ rated insurance company.
So far so good, but that didn’t mean too much to potential investment houses. Sure they were pleased with the security and the structure of the insurance programme, all done to maximise cash flow protection and balance sheet strength, but how did that increase the credit rating?
We had to prove it and we did. Or rather our chosen insurers demonstrated it through the use of credit rating analysis system they had devised. The impact was stunning as the rating of NewCo was demonstrated to have gone from B (highly speculative grade investment) to BBB (lower medium grade investment level) a very decent jump of 6 credit notches upwards. Enough for some lenders to now get involved.
That job done, the investment has moved forward via the Capital Markets Division of a major bank.
This approach won’t be suitable for every businesses but it does demonstrate that a little bit of lateral thinking can sometimes overcome a seemingly impossible situation.
So, if credit rating is preventing you from achieving significant funding, or the cost of funding is very high as a result of a low credit rating, it’s worth investigating how the commercial insurance market may help. Contact a good insurance broker such as AT&A Corporate Insurance Brokers in Ipswich.