Ensuring That Your Banks Are There For You When You Need Them
Strategies Learnt from the Financial Crisis
by Sarah Greenall
The arrival of the financial crisis coincided with approaching maturity dates for many corporate borrowing facilities which needed to be repaid or refinanced. Treasurers also continued to receive requests for financing to support the needs of their companies. Broadly speaking, the loan markets continued to function effectively and deals got done, albeit not on the terms seen previously. According to data from Thomson Reuters, global syndicated loan proceeds were close to US$2trn in 2009, US$3trn in 2010 and US$4trn in 2011. There were some notable successes, for example the Association of Corporate Treasurers Deals of the Year in the Loan category including Heidelberg Cement’s E3bn revolving credit facility and ABB’s $2bn syndicated loan. In addition there were those deals which on receiving negative feedback from the market had to be revised and re-launched with different terms.
Of course every deal is different, but common features can be observed amongst some of those deals which were successful as well as those which were not. A key determinant of success was and continues to be a robust group of long-standing relationship banks. It is not possible to specify the ‘right number’ of banks: for some companies that may be five or six, others may need twenty to thirty. This will be a function of the quantum of funding that the company needs, its credit profile, its bank needs and the size of its ancillary business wallet.
It is not possible to specify the ‘right number’ of banks: for some companies that may be five or six, others may need twenty to thirty.
An obvious risk comes about from over-reliance on a small number of banks. If one or two fall away, it may call into question whether the residual amount raised will be sufficient to meet the needs of the company, or whether the remaining banks will be willing and able to step up with additional commitments. During the credit crunch, many banks were forced to be highly selective in choosing which clients they could continue to support due to their constrained balance sheets. It was not uncommon to see at least one, if not several banks fail to renew their existing lending commitments. Certain banks retrenched back to their home markets, with some, particularly those in receipt of government financial support compelled to support national champions in preference to overseas clients. Whilst market conditions have since eased up, the risks and potential negative consequences of having too small a bank group remain, and these should be given consideration.
The bank loan market
If in the last few years we have learnt anything, it is that in finance, surprises are generally not a good thing. The same rule applies to the bank loan markets. Early communication of a company’s intention to refinance is extremely helpful in achieving smooth execution. In the current market, most banks will require the approval of at least two internal departments or committees in order to commit to a facility, one being on the risk/credit side, the other being business/profitability. A typical two week timeline between launch and confirmation of commitments presents a tight timescale in which to secure these approvals. An early warning of the intention to refinance, or a few extra days added to the financing timetable can be invaluable in ensuring that commitments are obtained on time from all banks and the financing progresses on schedule. In difficult times, banks are more likely to err on the side of caution and decline requests when faced with quick, or indeed rushed decisions. Also on the subject of timing, whilst it is possible to get deals done over Christmas or in the midst of the (European) summer break, the absence of key staff members, both for treasury and the banks mean that these windows do not always offer the smoothest, or most timely execution. If there is no compelling reason to obtain finance at these times, they are perhaps best avoided.
Following the exposure of shortcomings in ‘Know Your Customer’ anti-money laundering and economic sanctions due diligence processes, this area is under significant scrutiny at many banks. As a result, banks may request additional information about the company, or wider group to complete their diligence and checks may take longer to perform. When drawing up a financing timeline, it may be necessary to allow extra time for the banks to complete this aspect of the process, particularly any new participants in the bank group.
Relationship profitability gained heightened focus during the credit crunch and remains a key determinant in bank lending decisions. Whilst calculated differently, broadly speaking profitability is a function of the bank’s return on capital from any financing provided, together with income earned from ancillary business such as payments and cash management, foreign exchange, capital markets and M&A fees. A company with a very large bank group which spreads its ancillary business thinly may risk declined commitments from those banks who are unable to meet minimum profitability requirements. Failure to understand the profitability expectations of each bank in the group as well as the types of ancillary business which are more, or less attractive to each bank may also risk capital commitments being declined. These factors will vary across the bank group and may change over time. A small mandate, in an area that a particular bank is looking to grow – for example, local cash management in a country where it has opened a new office, is likely to be very valuable. A bank which can achieve a low cost/ income ratio in a particular product, for example because they have a high market share, may consider the business more profitable than others. Some types of ancillary business which were historically considered attractive such as interest rate derivatives (particularly those which are long dated, or cross-currency), may now be less so, given increasing capital requirements for those products under the Basel regimes.