Management Accounting

The Quest for Capital

CFOs are putting on their negotiating hats as they face pressure from customers for more lenient payment terms, as well as from their increasingly ...
Sarah JohnsonJune 16, 2009

The economic downturn has caused CFOs to hone their negotiating skills for maintaining their access to capital. To keep the money they do have flowing and to make sure they have backup lines for future capital needs, finance executives are having more back-and-forth discussions with their customers, suppliers, and bankers.

For one, Thomas Ackerman, CFO at Charles River Laboratories, is waiting to hear back from a customer that wants its payment terms doubled from 45 days to 90 days. On the surface, the request seemed strange since the client — a large pharmaceutical company — is well-capitalized. Instead of just saying yes because so many clients are less able to get funding these days, Ackerman has asked the pharma firm’s CEO for something in return for a more lenient payment agreement. “If we see additional business [from them], we’ll talk,” said Ackerman at The CFO Core Concerns Conference in Boston today.

Ackerman and other finance executives at the event, which runs through Thursday, bemoaned their current predicament as their business partners keep putting the squeeze on their working capital. At the same time, their own credit has become costlier and ever-harder to come by.

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However, Holly Felder Etlin, managing director of turnaround firm AlixPartners, cautioned against letting the instinct for holding onto customers during this recession take over the need to be cautious when extending trade credit. Most recently an interim CFO at media firm Freedom Communications, Etlin expressed astonishment that companies are continuing to extend credit and services to customers that are six months overdue with their payments. These companies should be talking with late payers to renegotiate terms and reprimanding employees who allow such situations to continue, Etlin said.

Too often, companies are still loyal to customers that were once creditworthy but whose financial situations have tumbled. “Customers are just as dependent on you as you are on them. You need to be willing to use that relationship to get partial paydowns for each additional week you continue to provide service to them,” Etlin suggested

At the same time, conference panelists cautioned, companies shouldn’t try to stretch out their own payables past their due dates to give themselves wiggle room. In an uncertain marketplace, trust has become a top and crucial assets as only creditworthy companies are predicted to make it out of the downturn in good shape.

World Fuel Services CFO Ira Birns went through a bit of a working-capital culture shock two years ago, when he went from the technology industry as the treasurer of Arrow Electronics to his current post at the Miami-based fuel provider. While the tech industry is relatively lenient about late payments, the fuel sector looks at bills even a day late as a harbinger of possible trouble at the client company.Moreover, in this economic environment, “everyone is very skittish,” Birns cautioned. “You don’t want to play games with payables in any behind-the-scenes way.”

Indeed, added Etlin, “one of the worst things you can do in this down economy is make suppliers more nervous.” Etlin saw the effects of vendors’ distrust with grocery chain Winn-Dixie, whose slow descent toward a bankruptcy filing a few years ago was accelerated when it lost more than $175 million in vendor credit practically overnight because of suppliers’ uncertainty about the company’s future.

Another group currently rife with uncertainty: bankers, who are dealing with their own higher capital requirements and have become less willing to share what money they have left to spare. These days, they are more likely to declare a borrower in default of a covenant before bothering to renegotiate their lending terms, said Peter Humphreys, a partner at McDermott Will & Emery. Debt covenants have quickly become tougher, lending terms are shorter, and bankers’ fees are higher. A self-described pessimist, Humphreys believes companies’ access to capital will continue to be difficult.

He advised the finance executives who attended The CFO Core Concerns Conference to “beat the bushes” to consider ways of getting money that they may have bypassed in the past, like pursuing PIPE (private investment in public equity) deals and asset-backed lending facilities. Hitting up shareholders for more equity may be a more fruitful endeavor than “fighting the banks at this point,” he said.

Moreover, Humphreys suggested that CFOs put their current lending contracts through worst-case scenarios to see if the terms should be renegotiated now rather than waiting until they are in default, when their banks will be less likely to give them any leeway.

To be sure, cautioned Holly Keller Koeppel, CFO of American Electric Power, be prepared to pay up for the right to refinance. “Be cautious of new terms,” she said. “Don’t think your new loan will look like the old one.”