Wachovia environmental affairs manager Patrick Mumford says his bank has spent the past 18 months developing an environmental strategy, still in draft form, that addresses not only its own building and procurement activities but also its lending practices.
Brune says pressure from his organization and other activist groups has already had an impact on some business projects. Strong stands taken by Citigroup, JPMorgan Chase, and other banks have encouraged the consortium pursuing the Sakhalin II project to take additional steps to mitigate its effect on salmon-bearing streams, local communities, and endangered wildlife species. "It certainly has delayed the project, and could very well stop it from going forward altogether," he contends. Brune says Citigroup and other lenders also have pushed a number of clients in Papua New Guinea and other areas to certify that their logging practices meet stringent environmental standards.
Corporations, accustomed or not to hearing complaints directly from environmental activists, may encounter more of this sort of pressure from lenders. "You need to take this very seriously," says Mumford. "You may find that banks will suggest you need to modify how you do business or you may not be able to continue the relationship you had with them, because banks are very sensitive to the risks associated with these issues." — R.M.
How to Cope
What should corporate borrowers be doing? The most obvious course of action is to get while the getting is good. Consider refinancing credit revolvers and other bank loans to take advantage of current market conditions. Extend terms. Consider boosting the size of your credit facility and negotiating less-stringent covenants. Many CFOs and treasurers have already done that, and if they've done it recently enough may find it counterproductive to do so again. Goodyear Tire & Rubber's Darren Wells says he declined to do a fourth refinancing this year because the upfront fees generally outweighed the savings from the lower interest rates he was being offered.
Mike Gallanis, managing director of consulting firm Treasury Strategies, in Chicago, encourages companies to do everything they can to strengthen their relationships with their credit banks so that if and when a tightening does occur they're positioned to deal with it. "It's a relationship-management issue," he says. "It involves doing things like having an ongoing dialogue with the banks, including them in deals when there's an opportunity to include them, and maybe doing something on the investment-management side and awarding noncredit kinds of business to them. Companies also should take a hard look at what they're spending on noncredit services to ensure they are adequately and equitably rewarding the players they want to appease."
Firms unsure about whether they can handle this wallet-share balancing act with sufficient acumen may want to consider using a risk-adjusted return on capital, or RAROC, model to evaluate the profitability of their business to their banks (see "Inside Your Banker's Head," CFO's Banking & Finance Special Issue, October 2005). Having access to a RAROC model, says John Walenta, director of the corporate and institutional banking practice at consultancy Mercer Oliver Wyman, can give firms leverage in negotiating fees with their banks.
Companies that issue bonds may want to consider refinancing that debt, too, extending maturities and taking advantage of the tight spreads between short- and long-term debt. Wells Fargo has been looking to borrow with longer-term maturities because spreads have been so narrow. It's had opportunities to borrow in sterling, in the euro, in Australian dollars, and in Canadian dollars, and has been issuing debt in a variety of foreign currencies over the past couple of years.
The one thing few corporate borrowers need to do is panic. "There are some signs the cycle is starting to turn, but until we start to get significant default levels, I don't think we'll see any major trends taking place in the market," says Walenta. "It's still very competitive, and banks are still very aggressively bidding for business." — R.M.
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