Knowledge Centre

Times like these, with uncertain economic forecasts and higher rates, can create a quandary for solid-footed, mid-sized companies. While they may continue to see promising growth opportunities, the economic forecasts can create uncertainty for companies seeking the capital to push on with their expansion, acquisition or ownership transition goals.

Fortunately, close collaboration between Scotiabank Business Banking and Roynat Capital, a wholly owned subsidiary of Scotiabank that provides junior capital to mid-size companies, means that these businesses can access debt and equity options tailored to both the times and their ambitions.  

Capital options help companies push on

“Despite the current macro-economic environment, we see many strong companies that are driving solid revenues, earnings and valuations,” observes Robyn Chisholm, Vice President & Head, Commercial Banking in BC & Yukon. “They are naturally attuned to the current conditions, but they are poised to take advantage of timely growth opportunities, M&A, or partner and investor buyouts that could come up.”

However, market conditions can complicate their plans, points out Derek Strong, Roynat Capital’s Regional Vice President in Vancouver: “Often, companies may seek conventional financing, or secured/senior debt, for business expansion or acquisition, but this becomes more difficult when interest rates rise and their cost of capital goes up. This is when a buyer could consider junior capital, such as subordinate/mezzanine debt or equity, to help fill the financing gap, since it’s more ‘patient capital’ in terms of repayment terms and other obligations.”

In addition to current, higher borrowing costs, business owners are alert to the need to preserve their working capital, as a buffer against market uncertainty.  Chisholm describes how, “In this environment, it can be valuable to conserve your cash and maintain a strong balance sheet. That means that companies with growth plans might consider higher-leverage borrowing, or patient financing, such as equity investments, or mezzanine financing.”  

By doing so, a business can reduce its dependence on fixed repayment terms and covenants typical in traditional loans. For example, mezzanine financing, often described as a hybrid of debt and equity financing, can offer repayment terms that are geared to a company’s cash flows.

Strong notes that, “Scotiabank is unique since, in partnership with Roynat Capital, we can readily provide these patient capital structures, depending on the needs of our clients, their company lifecycle or the economy.”

In fact, for almost 30 years, since joining the Scotiabank family, Roynat has delivered distinctive senior and subordinate debt, mezzanine capital and equity financing solutions to Scotiabank clients.  Roynat itself celebrated its 60th anniversary in 2022, providing long-term capital solutions to mid-sized Canadian companies.

“This really gives Scotiabank clients more choices,” says Chisholm. “Instead of only being offered a senior debt solution by your banker, we can provide other flexible debt, mezzanine or equity solutions, and our clients can decide what is most important to them. By providing other options, we can give our clients flexibility from a debt servicing perspective, and comfort that they can weather the economic conditions ahead.”

This proved to be the case for a family-run, BC distribution company that was preparing to transition ownership from one generation to the next. The company sought third-party, transition financing proposals from various banks, to help the second generation buy into the business, and enable the company founder to reduce his equity stake and fund his retirement.

Recalls Strong, “Other proposals they received recommended senior debt products with traditional terms and covenants. Although they offered a low interest rate and standard amortization period, this would actually create greater risk for the new owners since it would reduce their working capital. In contrast, our Scotiabank/Roynat proposal combined a senior and junior debt structure that would give the customer the utmost flexibility in terms of reducing their use of working capital, lowering their payments, and creating an overall better structure to face unknown, future business conditions.”

Noting that the family business ultimately decided to partner with Scotiabank/Roynat, Strong explains, “They chose us because we offered them a different, advantageous structure and we could clearly explain the value it would bring to their company.” 

Pandemic reveals the value of capital planning

The COVID-19 pandemic illustrated two distinct ways that companies can benefit from carefully curated capital structures. On one hand, many companies faced supply chain slowdowns and logistics challenges that stalled their production or left them with unsold inventories. “This could put a real strain on a company’s cash flow,” describes Strong. “However, if they had previously incorporated other forms of debt or equity into their capital structure, they would have more flexibility in juggling their debt repayment terms and preserving essential working capital until business improved.”

On the other hand, some companies thrived during the pandemic and found themselves awash in cash, which they confidently spent on assets, supplies or expansion.  Explains Strong, “Buying equipment with cash may seem like a sound decision when business is good, but eventually conditions can turn, your profitability drops, and suddenly you have a working capital problem. Now, as inflation and interest rates eat away at some companies’ cash balances, and the potential for an economic slowdown exists, they need to rebuild the cash on their balance sheet as a safety net. In hindsight, they could have pro-actively put the right capital structure in place, refinanced some of their debt to hedge the interest rate risk, and maintained their cash balances.”

“No one knows for certain what economic conditions are on the horizon, but we know that the companies that have consistently fared better through tough times are those with stronger working capital,” says Chisholm. “These companies always plan ahead and put the right capital structure in place.”

Such companies have also wisely turned to the closely-aligned Scotiabank/Roynat teams, whereby Scotiabank Commercial Banking Relationship Managers eagerly involve their Roynat counterparts in client meetings, to understand their needs and ambitions, build long-sighted plans, and strategize on new business opportunities. “Our teams work side by side, and right in the same Bank offices, across the region,” notes Chisholm.

As a result, the combined Scotiabank/Roynat team is ready to help a customer in virtually any part of western Canada’s coast, north or interior to keep calm, carry on, and grow wisely in the current market. “There are great companies whatever economic cycle we’re in,” concludes Strong. “Our offering is designed to provide them with significant flexibility in good times or bad, and help them achieve their goals regardless of the economic headwinds they face.”

For more information on capital solutions tailored to your business, please contact us.