Prepare for the Era of Scarce CapitalThe Staff of the Corporate Executive Board
There is no question that corporate finance executives have weathered an unprecedented disruption in the banking industry. Borrowing costs have increased significantly in 2009. Debt pricing has increased substantially for investment grade companies (from 53 basis points more than LIBOR to 185 basis points more than LIBOR). Debt maturity dates have decreased from an average of three to six years to one year or less, indicating bank unwillingness to take on any risk.
Midsized companies active in this credit market face a tough environment. A recent survey by the Corporate Executive Board revealed that roughly one quarter of CFOs at midsized companies had sought an amendment for their loan covenants in the first half of 2009. CFOs who renewed their credit facilities in 2009 reported increases in fees as well as tightened covenants and reduced credit access.
"The bottom line is it's a lender's market right now," says one CFO. "If you can hold on to your existing credit lines at a slightly higher cost, you'll be doing well."
Rather than waiting for the thaw, finance executives can prepare for significantly reduced access to bank lending over the long term with these five tips in mind:
1. Beware of falling into the "not me" mind-set—Startlingly, 40% of our finance executive clients still believe that they will not experience reduced credit access in the near future. In reality, 90% of our finance executive clients undergoing renegotiations across the last six months experienced a significant reduction in their access to funds.
2. Reexamine your strategy of consolidating with one or two large banks—Many large multinational banks have credit default swaps trading at very high spreads, suggesting a market perception of high bank credit risk.
3. Get a head start on your credit renewals—Plan for 12 to 18 months to negotiate a syndicated credit or loan agreement. Create a road map for which banks might reduce their commitment, a list of potential replacements, and a schedule for building relationships with new banks.
4. Do your homework on each bank's business approach—Expect dramatically different approaches to the "credit-for-fee-business" arrangement from banks. Smaller, healthier banks will provide substantial credit for relatively little fee business in return.
5. Prepare to diversify funding sources as the overall pool gets smaller— Build the skills and experience to use long- or medium-term debt as well as securitization and private placement.