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.

Tommi Valento, CFA Head of Debt Advisory KPMG Transactions & Restructuring