With the economic outlook for the U.S. and global economies still hazy, liquidity and access to capital are at the front of many CFOs’ and treasurers’ minds.
When capital was cheap, banks readily loaned to any creditworthy businesses, but higher interest rates and other factors mean banks are now taking a fine-tooth comb to loan customers to determine the bank’s all-in returns.
With capital not a commodity anymore, the question is back to the total banking relationship.
"Banks are being a lot more intentional, strategic, and open about what they need in return for their capital."
Head of commercial rate & FX solutions, Wells Fargo
Company A may borrow money at a 5% spread, but Company B will borrow at nearly the same rate and use the bank’s cash management product and deposit nonoperating funds with it. Company B may offer the bank a better return on its assets.
The extent of a banking relationship will be an important discussion for CFOs whose companies have debt maturing in the next two years or so, said panelists at the New York Cash Exchange conference last week.
In the last 15 years, banks have been looking to lend to businesses to earn yield on their deposits and other cash because other investments offered very small returns. But now, banks, although not in crisis mode, “are being a lot more intentional, strategic, and open about what they need in return for their capital,” said Jessica Murphy, head of commercial rate and FX solutions at Wells Fargo.
Murphy sits on weekly calls of the banks’ credit and allocation committees, she said during the NYCE panel. “This is a conversation that is happening across all banks … depending on the bank’s size and scale, the pressure may be more acute,” she said.
The Federal Deposit Insurance Corporation’s quarterly profile of U.S. bank earnings for the second quarter showed that while net income overall increased, net interest margin (the spread earned on loans) fell, largely due to rising rates on deposits; unrealized losses on securities portfolios increased; and total deposits decreased half a percentage point. Noninterest, or fee, income, also dropped.
At the same time, proposed rules from the Basel Committee on Banking Supervision would require U.S. banks to hold between 6% and 19% more capital, depending on their size.
That’s the backdrop against which some CFOs and CEOs will negotiate refinancing deals in the next two years.
According to Standard & Poor’s, maturities of corporate debt rated “speculative grade” are relatively low in the next 12 months but quickly rise to $84 billion in the first half of 2024 and $173 billion in the first half of 2025.
The only companies that may “dodge this conversation” with their bankers are those that have redone their credit facilities in the past two to three years and have five, six, or seven years left before they have to touch them again, said Murphy.
At restructuring firm Alvarez & Marsal, CFO Steven Cohn said the company had the option recently to extend its five-year credit agreement by one year and decided to exercise the option. Although taking the option required a fee, the holdup that arose was the unexpected pushback from some of the smaller banks participating in the facility. They wanted to know how they were going to earn other money from the relationship.
“They wanted transaction business, they wanted accounts business, they wanted deposits,” said Cohn at the NYCE panel.
While Cohn eventually agreed to put deposits in some of the members of the syndicating group because he values the relationships, he agreed to do so only when he had cash left over after paying down some of the company’s revolver. Only one bank declined to extend because it wanted a certain kind of deposit, he said.
Cohn said in general he tries to avoid bank deposits “because I don’t really want to be in the credit business. I don’t want to have to evaluate the balance sheets of the various banks.”
“I really believe that having a relationship with your lenders is critical to dealing with whatever's coming forward, and we don't know what's coming forward.”
CFO, Alvarez & Marsal
Cohn’s experience underscores the point: If a company has debt maturities in the next few years, the conversation about a line of credit or loan is not something the CFO will want to “urgently spring on their banks,” said Murphy.
“There needs to be a really thoughtful conversation about the partnership, and what the opportunity set looks like on both sides,” she said.
Cohn said good relationships with the company’s bankers are key.
“When I was a young kid, I worked for a guy who borrowed money in his business. His attitude was, ‘If you give me credit, if you loan me money, I will tell you whatever you want to know about my business because you have been good enough to lend me money.’ And I have followed that maxim ever since,” Cohn said.
As a result, said Cohn, Alvarez & Marsal is an open book to its banks. “We will take any question at any time and explain what's going on. And we think it's important for them to understand our business. Because if there ever was a hiccup — fortunately, there hasn’t been — but if there were, you want somebody who says, ‘I understand your business; tell me how you're going to deal with the problem you're facing.’”
Added Cohn: “I really believe having a relationship with your lenders is critical to dealing with whatever's coming forward, and we don't know what's coming forward,” he said, referring to the direction of the economy and interest rates.
The companies that all along have been managing their interest-rate risk, diversifying their businesses, building meaningful bank relationships, and diversifying their balance sheets with either diversified maturities or strong liquidity are the ones who will be the most stable in the coming year, said Murphy.
“[That] work has been done by folks in this room at many companies for year after year,” she told the audience of 100 or so treasurers and other finance executives. “And it just didn’t feel appreciated or valued. An environment like this is kind of when [all that] pays off.”