Are Banks open for Business? / Tommi Valento
This question is something that I hear quite often these days when advising companies in issues related to debt financing. Virtually every day we can read about the eurocrisis, the Greek bailout, and the tightening of the banking regulation (e.g. Basel III). It is difficult to analyze the full impact of all of these on banking and debt markets, but what everybody seems to agree on is that obtaining new debt financing will be more difficult in the future and the cost of financing is higher than what it used to be. The official guidance by major banks in Finland is that they are open for business. In practice the banks are “selectively” open for business. Selectiveness can mean several things and probably different things to different banks. It can for example mean that banks focus on less risky companies/assets/projects or stay clear of certain industries.
If answer to the question in the title is that banks are
selectively open for business, what does this mean for potential borrowers?
1. To be ahead
of the other parties competing for the loans, you should do your homework
before approaching the banks. You should prepare in advance materials that the
bank can use in their internal credit process. This means a comprehensive info
package including company presentation, information regarding the financing
need and most importantly the financial forecasts for next 3-5 years. Why?
Because it will reduce the work that people at banks have to do when preparing
your case for credit approval. It will also reduce the likelihood of
misunderstandings and the need for additional questions and hence reduce the
time the process takes. It will also make sure that you will have your story
straight and facts to back it up, which will increase confidence in banks and
also show that you’re being serious about the process and have taken time and
made the effort to prepare.
2. In current market conditions, financing should be on top management agenda, which means you should make the senior management available to the banks (preferably face-to-face meetings).
3. You should
contact banks, and other financiers such as insurance companies, broadly rather
than just contacting a handful banks that you’ve cooperated over the years.
While your house bank is most likely your strongest candidate, it is difficult
foresee which companies/projects/industries/geographies are appealing to which
financiers. The terms that the financiers are offering can also vary
considerably making it worthwhile to do more legwork.
4. You should start the discussions with financiers well before of the actual financing need to account for longer credit processes and allow time for “fallback plan” in case the financing negotiations fall through
5. You should also be prepared to the terms that banks are offering in these market conditions. This means lower leverage, shorter tenors, higher fees and margins, and more extensive security and covenant packages.
6. You should
also consider using financial advisers. Sometimes it’s helpful to have an
independent party that can help you in analyzing your capital structure,
financial situation and financing need, preparing the info package and other
materials, coordinating the financing process and supporting you in
negotiations with banks. A good adviser has extensive contacts within the
financing community, good understanding on what banks want and need and
up-to-dateknowledge of market practices and terms of financing. An independent
adviser can level the playfield between you and bank, make the process run
faster and more smoothly, allow the management to spend more time on running
the business and find you the most favorable funding solution available.
It is difficult to predict where the banking and debt markets are going. However, the coming spring will show if the banks are indeed open.