Posted on 17 Apr 2013
By

Acquisition finance in the holiday and home park sector

Whilst the current economic environment undoubtedly creates challenging trading conditions for a number of holiday and home parks, it also provides great opportunities for growth for owners thinking of expanding their portfolio through the acquisition of other parks.

Once a target has been identified, one of the main issues for a buyer is how to finance the acquisition. There are three main funding options available for prospective buyers:

  • use of existing resources;
  • debt finance; or
  • equity finance.

The majority of park owners will look to borrow money; including obtaining bank loans and debt securities (debt) or raise money by issuing shares to investors (equity) (or a combination of the two).

Debt Finance

At its most basic, debt finance is raising money by borrowing from a lender, with a promise to repay the money (usually with interest) at a later date. It can broadly be divided into two main types:

  • loans; and
  • debt securities.

The appropriate method will depend on the size and creditworthiness of the buyer, the availability and quality of security that can be given, the amount of money required and various tax considerations.

Loans

Loans are the simplest form of debt finance. They can either be bilateral (from a single lender) or syndicated (from a group of lenders). Bilateral loans are the most common form of lending.

Loans can either be secured or unsecured, but, in acquisition financing lenders will almost certainly require a comprehensive security package from the borrower and, often, the target. The security will attach, where possible, to all of the buyer and target's assets. Assets commonly used as security include land, buildings, machinery, intellectual property, trading stock, book debts, cash and shares in the borrower and target.

Debt Securities

Debt securities are a form of financial instrument that is issued to create or acknowledge indebtedness. In the case of funding an acquisition in this sector, the debt security that tends to be used is the issue of 'loan stock' by the buyer to the seller. In these cases, the instrument will contain a promise by the buyer to pay the holder of the instrument, the seller, a defined amount (usually with interest) on or by a specified date (this date is when the debt security is said to 'mature').

Whether debt finance is used in the form of a loan or the issuing of debt securities, a key question for lenders will be how their debt ranks on the liquidation of the borrower. A properly created 'security package' will improve the position of the lenders on an insolvency, giving priority over other creditors in respect of the charged assets. It is crucial that specialist advice is obtained in order to achieve this.

Equity Finance

Equity finance is the act of raising money for an acquisition by selling stock (most commonly shares) to individual or institutional investors. For the purposes of the holiday and home park sector, the most common forms of equity finance are:

  • share issues to existing shareholders; and
  • private equity.

Share Issues

Share issues may be a simple as simple as current shareholders putting more equity into the buyer to find the acquisition, either pro rata to current shareholdings or not. For listed buyers, a placing or rights issue can achieve the same result. The issue is usually to be subscribed in cash and is nearly always at a discount to the market price.

Private Equity

Private equity (or venture capital for smaller deals) is a term which covers a range of transactions in which the source of finance is usually a fund that is established to invest specifically in private companies (and, in some instances, specifically within the holiday and home park sector). Private equity transactions have increased in recent years due to the reduction of banks willingness to lend and availability to obtain cash. Private equity investment can add value in ways that debt finance simply can't. Most obviously, private equity is invested in exchange for a stake in the buying company. Therefore, as shareholders, the investors' returns are dependent on the growth and profitability of the business – they have a vested interest in ensuring that the business is successful. This, coupled with the expertise that private equity investors can bring, is making it an increasingly attractive option for owners of holiday parks looking to expand.

Debt Finance or Equity Finance?

A number of factors will determine what the best funding option will be for each particular case. However, a key issue is normally the comparative cost of debt and equity and the bank or private equity investors' appetite for lending.

The cost of debt is, at its most simple, the interest rate at which the buyer can borrow. Further, borrowing is tax efficient – interest (unlike dividends) is tax deductible from profits. On the other hand, the cost of equity is based on forecasted shareholder returns (including dividends, capital appreciation and share buybacks). Because their proportion of future dividends and capital growth will be diluted, the cost of equity finance is, therefore, predominantly borne by the existing shareholders rather than the company.

However, there are other considerations that should be taken into account when deciding on the most appropriate form of funding. These include:

  • The existing capital structure of the buyer – if the debt ratio of the buyer is already high, the buyer may only be able to finance the acquisition by equity finance; and
  • Restrictions on borrowing - the buyer's articles of association or existing loan agreements may restrict its ability to borrow.

This article provides a high level review of some of the types of funding that are available to park owners. You should take specialist advice on the type and suitability of finance before proceeding.

If you would like to discuss the types of financing available to you, or to discuss any other queries relating to your holiday park, then please do not hesitate to contact the head of Michelmores Holiday & Home Park team, Annelie Carver, on 01392 687714 or annelie.carver@michelmores.com.