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The key takeaway: do your due diligence on the shrinking universe of lenders as early as you can. And maybe buy some derivatives or credit insurance to make you look less risky.
David M. Katz, CFO.com | US
October 15, 2009
These are days of great uncertainty for companies wanting to hang on to their ability to borrow money. Clark D. Griffith, a vice president and senior relationship manager with UnionBank in Los Angeles, says that one of the bank's clients, a public company that had a credit facility backed by a syndicate of many lenders through June 2011, recently made "a strategic decision" to continue that arrangement for just a single year. And it cost the company a pretty penny.
What the borrower did was to strike an "amend and extend" arrangement with the syndicate, changing the terms of the deal in midstream and putting down extra money to extend it. To push its borrowing capacity out to 2012, the company cashed in its then-current interest rate of the London Interbank Offered Rate plus less than 1% of LIBOR for a rate that was "north of 3% of LIBOR," according to the banker.
Speaking during "Where to Get Credit Now," a panel at last month's CFO Rising West conference, Griffith used the example to illustrate the world of whopping amendment charges, closing fees, and increased pricing that corporate borrowers — many of which are facing imminent loan maturities — are running into in today's credit markets. In the current climate, finance chiefs are under intense pressure to negotiate extensions, renewals, or new credit facilities well before their current transactions expire, panelists agreed.
Another speaker, Gary Rosenbaum, an attorney with McDermott, Will & Emery who counsels both borrowers and lenders, advised corporate finance executives: "If you have a loan facility that's coming due in the next year, do the lap of the smaller universe of potential lenders — and get out early." Citing such developments as the recent spate of big bank mergers and the disappearance of collateralized loan obligations, which once backed the bulk of syndicated loans, he noted that "the world of lenders has shrunk."
At the same time, corporate executives need to take a close look at their prior arrangements with banks because the economy has undergone a sea change in the past year, according to the attorney. The executives should figure out if the covenants on three-year or five-year credit facilities arranged before the financial crisis are still accurate. If they're not, executives might be able to avert disaster by pointing out to lenders conditions that, for instance, might push the company into default, Rosenbaum said.
Another takeaway: finance executives should gain a good grasp of the pressure their lenders are under in order to know what borrowers should expect when seeking credit. Credit officials, said Griffith, are not "big bad evil entities in a private room deciding whether to do a deal or not. These credit approvers are the same people that have lost their consumer confidence and are not spending as much money on cars or TVs. They're a little bit more skeptical on the credits they're underwriting. It's very difficult for them to understand where the economy is going. So they want a lot more attention to detail and a much clearer, transparent understanding of the borrower."
Besides the pressures generated by uncertainty, banks are undergoing much more intense scrutiny of lenders' existing clients by the Office of the Comptroller of the Currency and other regulators, according to Griffith. In turn, credit officers are drilling down much further into borrowers' financial arrangements than they were two years ago. Providing an example of that, he spoke of a longtime client seeking an arrangement that previously would have been a simple rollover of existing debt. "Two years ago, there would have been a quick memo; it would have shot up the chain," noted Griffith, and the credit approvers would have said, "the company's profitable, done."
In these times, however, the client must endure much more extensive scrutiny for "some nonspeculative hedging" that would have been perfectly acceptable before. Now, Griffith is finding that he must draw diagrams "that actually show the accounting flow for such transactions" to help regulators understand the accounting. "It's gotten to the point where I would even recommend bringing the senior credit officer out to the field to meet with the company," he said.
To be sure, it wasn't uncommon in the past for bank credit staff to visit a company for "a superficial walk through the warehouse, [a] look at the inventory and systems, just to get a big-picture feel," noted Griffith. In today's climate however, visitors from the bank need to find out if the company has the personnel to make it through the current crisis and whether its collateral can stand up as a secondary source of payment to the bank in the event of default.
The banker observed that corporate finance executives have a growing awareness of this. "I'm finding out that word's gotten out," said Griffith, "because people are much more willing to stay on the phone and explain their case."
Indeed, corporations should work harder to sell themselves as acceptable risks to their bankers, the panelists agreed. "If you as a borrower can't present a package to your lender that has that kind of necessary detail, it's going to be harder for the lender to get his or her superiors to approve it," said Rosenbaum.
In contrast to Griffith's client, another participant, Michael McAdams, a former chief executive of Four Corners Capital who for decades put together syndicated loans, suggested that other corporate borrowers may make lenders more amenable to lending through the use of derivatives. The lending-approval officials of a syndicate might want to lend to a poultry business that can prove it effectively hedges pricing risk by buying poultry futures or a wire manufacturer that does a good job of protecting against copper-price fluctuations, he said.
Further, if a finance chief's boss doesn't believe in buying derivatives to hedge risks, "you can show the banks or [syndicates] how to do it" so that they can buy the proper instruments to manage their client's risks, said McAdams.
Besides hedging, many companies are buying credit insurance on their receivables to make themselves more attractive to lenders, according to Griffith, who acknowledged that, unfortunately for the insured, the policies can be cancelled on very short notice. "They are an extra added protection for any borrower that may be on the fence," he said.