The loan market is fragile. Businesses
are finding it more difficult to obtain
credit and liquidity as banks with reduced balance sheet capacity struggle to
shrink assets and raise prices to meet
increased funding costs. As a consequence,
execution in the syndicated multibank loan
market is less predictable. Some businesses,
however, are still able to tap the syndicated
market for the capital they need.
Cathleen Walker of PNC’s debt capital markets group talked with Smart Business
about how some businesses may be able to
gain access to capital through syndicated
deals, despite market volatility. She suggests
that relationships factor even more into lenders’ decision-making processes during a credit crunch and provides tips for businesses to
better position themselves to seek capital.
How is the syndicated loan market impacted
by economic conditions?
In a difficult economic environment,
lenders often tighten their belts and scrutinize deals in more detail, focusing on minimizing their risk and meeting their required
risk-adjusted returns. Asset quality and
return on capital become paramount. At the
same time, mergers and acquisitions are
more commonplace in the financial services
industry. The outcome of all of this is a
reduced pool of active lenders in the broadly
syndicated market. Some of the lenders that
remain may be less certain of their near-term
and long-term strategies and, therefore,
choose to reduce their activity until there is
more stability.
What this means for businesses seeking
capital is that lenders are taking a more conservative approach to structure and overall
return on their investments. This approach
usually includes saving the capital that is
available for companies with whom they
have an established relationship.
Why have relationships become a decisive
factor?
When capital is scarce, credit becomes
more expensive and lenders take a more disciplined approach to allocating it among borrowers. When evaluating the risks and
returns in lending to a particular company, banks assess credit quality, price, size, tenor,
structure and purpose for the requested
funds, but also look beyond the quantitative
factors and consider their relationship with a
company’s senior management team.
Lenders may think about how often they’ve
come into contact with management and
whether or not management has been readily accessible and responsive when questions
or concerns arose.
Ancillary business is also significant to a
bank’s return models when evaluating overall exposure to a company. There are very
few lenders willing to ‘buy assets’ (i.e. provide credit without ancillary business). In
today’s environment, the cost of capital for
banks is just too expensive to rely exclusively on interest income as a source of return. It
is not uncommon for lenders to reduce their
commitments to companies where they do
not have sufficient ancillary business.
How can a business better position itself to
seek capital in the syndicated market?
■ Meet with your lenders regularly to provide business updates. Contact them if you
haven’t heard from them recently.
■ Keep lenders up to date on your company’s performance and develop an understanding of their current lending strategies.
■ Provide opportunities for lenders to bid
on ancillary business and spread your ancillary business among multiple lenders. This
strategy can support your need for incremental debt capital for future growth initiatives. Lenders understand that they need to
be competitive, but they expect a fair and reasonable approach to proposals on ancillary
business. This will go a long way in building
a mutually beneficial, long-term relationship .
■ Be open to local and regional lenders.
They are often eager to play a more active
role and, although their commitment levels
may be smaller than you prefer, they can
increase as their institutions grow. They also
help to diversify your exposure to financial
institutions.
■ Take a conservative approach to forecasts and discretionary spending — particularly nonproductive uses of cash like stock
repurchases and dividends.
■ And perhaps most importantly, address
potential problems or concerns early.
Even in challenging financial times, there
are banks still willing to lend to companies
with good credit profiles that can commit to
open and honest communication.
This article was prepared for general information purposes only and is not intended as
legal, tax, accounting or financial advice, or
recommendations to buy or sell currencies or
to engage in any specific transactions, and
does not purport to be comprehensive. Under
no circumstances should any information
contained herein be used or considered as an
offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is
solely and exclusively at your own risk.
Please consult your own counsel, accountant
or other adviser regarding your specific situation. Any views expressed herein are subject to change without notice due to market
conditions and other factors.
©2009 The PNC Financial Services
Group Inc. All rights reserved.
CATHLEEN WALKER is a managing director in PNC’s debt capital markets group, part of The PNC Financial Services Group Inc. Reach
her at (412) 762-1015 or [email protected]. To learn more about the syndicated loan market, check out PNC’s Advisory Series
at pnc.com/joinus.
