Lenders' Views on Capex

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Do  lenders view all capex intense busineses negatively? What determines perceptions? IS a business with low maintenance capex and high growth capex non-desirable? what if capex is non deferrable.. and needs to be incurred..does it increse the risk that lender wont get paid? I am confused...because in a low growth, fragmented industry – growth capex can be a source of increased EBITDA and elevated multiples, thus ensuring that lenders get paid 

 

what am i missing? 

Comments (9)

 
Sep 16, 2020 - 4:02am

You've got kind of the idea. Depending on the industry some maintenance capex could be seen as fine. But generally speaking a high growth capex business will stave off lenders given the dent to FCF and the unpredictability with which growth capex can vary to budget financials. Super high level but hope this provides some perspective 

 
Sep 19, 2020 - 2:22pm

what am i missing?

The forest for the trees; capex doesn't matter as long as debt-service coverage ratio is within their comfort zone. 

Cash flow lenders don't give a shit about the balance sheet.
Asset-based lenders can be massaged if the growth capex results in tangibles being added to the balance sheet (accounts receivables, equipment, etc.) 

Lenders will basically let you fuck them no rubber if you stopped being a bitch about it: "here's the deal. What terms can you give me?" i.e "I just popped 30mg cialis, and I gotta fuck something; we can do this right now, or I'm moving on to another hole."

 
  • Associate 2 in PE - LBOs
Sep 19, 2020 - 5:23pm

Former private lender here. We like current cash flow - whether your cash requirements come from fixed charges in EBITDA or MCapEx is more or less irrelevant - you just structure terms around it (caveat: this partially ignores some competitive nuances and market factors).
 

For a given CapEx number, a larger portion for growth is preferable over maintenance because it can be “turned off,” but we’re already factoring that in. If the business today can already service its debt, then yes growth is nice for an additional cushion, but we don’t participate in that upside and would often rather reduce net debt by keeping that cash on the BS (but obviously we understand that equity benefits from growth and is going to invest it)

 
Sep 20, 2020 - 4:04am

Capex Example - Data Center Company w/ servers

Servers - 5 yr average life, depreciated over 3 years. But could be aged 7+ years, resulting in an immediate cost to upgrade and modernize

Maintenance capex = relates to spending required to maintain the quality of the Company's infrastructure and includes the replacement of existing servers in its data center facilities. If the existing servers are really "aged" and need to be upgraded ASAP, that's definitely a negative they can't avoid.

Growth capex - -increasing available capacity in existing data center facilities and to support revenue growth

 
Sep 20, 2020 - 6:01am

High capex reduces cash flow available to cover debt obligations so naturally, lenders view it as a net negative.

Growth capex is less a negative than maintenance capex insofar as it is theoretically optional. Lenders generally don’t care about the positives of growth—they don’t participate in the upside. 

In reality, the line between growth and maintenance capex is not always clear. In a lot of sectors, if you’re not growing, you’re falling behind so growth capex is not exactly “optional”.

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