How Do Lenders Feel About the US Economy and How Do Their Views Impact Your Business?

 

A recent third quarter survey conducted by Phoenix Management reveals lenders are increasingly pessimistic of the US economy in both the near term and long term.

This is a change from the same survey in the second quarter where lenders felt that economic performance expectations increased for the near term.

 

IN A RECENT SURVEY …

In order to better understand why there has been a negative shift in lenders attitude, we highlighted excepts from the survey to gain a better understanding of their views:

> Lenders optimism on the U.S. economy decreased 14% in Q3 compared to Q2 2019

> The majority of lenders believe borrowers will be moderately affected by the current trade war with China and expect a slight increase in borrower costs as a result

>  In Q3 2019, lenders’ optimism increased in large corporate (4%) and middle market (9%), however, expectations for small business saw a significant decrease (-26%)

> The majority of lenders agree that consumer behavior will be key to a continued strong economy. Survey respondents expressed some concern regarding consumer growth and in fact expect some moderation from the previous survey. While moderation is not a negative factor, it is a change from the stronger consumer growth trend the US has experienced in past quarters

> A significant percentage of lenders surveyed expressed concern with the following industries that are expected to experience the most volatility and increasing risk: Retail Trade, Manufacturing, Healthcare, Construction and Transportation and Warehousing

 

THROUGH THEIR OWN LENS …

It is important to understand that lenders view the economy through their own lens, which primarily focuses on risk. Their view influences decisions related to credit risks, new clients and companies they perceive as high risk that could default on their loans. 

It is extremely important that business owners understand how lenders view the economy and in particular how those lenders may assess their business.

The professionals at Revitalization Partners are frequently involved in helping clients find new lenders or refinance existing credit lines. 

Our experience in the second half of 2019 is similar to the shift in lender sentiment reflected in Q3 survey.   In particular, there are many lenders with a significant amount of capital competing for disproportionately fewer deals.

While this has been consistent for the past few years, we have seen an increasing reluctance to compete for deals for companies that have experienced difficulties within the prior three or four years. 

While these companies are currently profitable, their historical experience has played a larger factor in a lender’s decision than it has in the past.

 

CURRENT LENDER SENTIMENT …

So, given the current lender sentiment, how should business owners proactively plan for their working capital needs, including their credit line requirements from current or potential lenders?

First of all, it’s important to focus on the health of your business. Companies that are consistently profitable will be more appealing to lenders than companies that have an inconsistent history of profitability.

It’s also important to understand what level of liquidity is required to operate your business. Liquidity is defined as cash on hand plus borrowing capability.

The level of liquidity required to operate an efficient business is different depending on the capital structure and seasonality of a business.

If your current credit lines are not sufficient to achieve your company’s, liquidity goals, you should develop an updated financial plan and discuss your needs with your banker.

If for some reason, they are not in a position to accommodate your requirements, don’t be afraid to look for other lenders that may be in a position to better meet your requirements.

After going through this process, you may in fact find that your current lender might change their view and in fact offer a program that fits your requirements.

 

IF YOU HAVE QUESTIONS …

If you have questions regarding how you should go about positioning your company to determine the optimal level of liquidity or how to find a lender that will meet your needs, let us know and we would be happy to discuss your business requirements.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Selecting the Right Private Equity Firm

 

The private equity industry has grown dramatically in the last 20 years and we know more than we used to about its effects on the economy.

We also know that private equity funds have outperformed public equity markets over the last three decades, even after the fees they charge are accounted for. What have been less explored are the specific actions taken by private equity (PE) fund managers.

PE firms typically buy controlling shares of private or public firms, often funded by debt, with the hope of later taking them public or selling them to another company in order to turn a profit. But how do PE firms decide which companies to buy?

And what do they do once they buy them?

 

IN A RECENT SURVEY …

In a survey of 79 PE firms managing more than $750 billion in capital, Harvard Business Review provides granular information on PE managers’ practices and how firms’ strategies relate to the characteristics of their founders and do PE investors do what the academics says are “best practices?”

PE firms typically take three types of value increasing actions:

These value-increasing actions are not necessarily mutually exclusive, but it is likely that certain firms emphasize some of the actions more than others.  Private equity as defined it in this document does not include venture capital investments.

 

WHAT’S THE PRIMARY FOCUS OF THIS ENGINEERING? …

In financial engineering, PE investors provide strong equity incentives to the management teams of their portfolio companies.  At the same time, debt puts pressure on managers not to waste money.

In governance engineering, PE investors control the boards of their portfolio companies and are more actively involved in governance than public company directors and public shareholders.

In operational engineering, PE firms develop industry and operating expertise that they bring to bear to add value to their portfolio companies.

 

WHAT’S THE TARGETED RETURN?

It appears that private equity investors don’t seem to rely on the financial tools taught at business schools.  For instance, despite the prominent role that discounted cash flow valuation methods play in academic finance courses, few PE investors use discounted cash flow or net present value techniques to evaluate investments. 

Rather, they rely on internal rates of return and multiples of invested capital.  Instead, PE investors typically target a 22% internal rate of return on their investments on average (with the vast majority having target rates of return between 20 and 25)

An analysis of how private equity firms calculate hurdle rates – the minimum acceptable rate of return on an investment – also indicates also indicates a deviation from what is typically recommended in finance research and teaching.

They rely on exit multiples as a shorthand for evaluating their investments. (If a similar company is valued at, say, 10 times its earnings, take the earnings of the company you’ve invested in, multiply it by 10, and you have a rough valuation.)

HBR also asked the PE investors how the funds that provide them with capital – limited partners (LPs) – evaluate their performance. 

Surprisingly, the PE investors believe that their LPs are most focused on absolute performance rather than relative or risk-adjusted performance.

 

AFTER THE INVESTMENT … THEN WHAT?

What happens once PE firms make an investment?  The HBR study shows there is evidence of both financial and governance engineering. PE investors say they provide strong equity incentives to their management teams and believe those incentives are very important.

They regularly replace top management, both before and after they invest. And they structure smaller boards of directors with a mix of insiders, PE investors, and outsiders. These results are consistent with a focus on value.

Private equity firms founded by financial general partners appear more likely to favor financial engineering and investing with current management.  Private equity firms that have founders with private equity experience appear to be the most strongly engaged in operational engineering.

They are more likely to invest with the intention of adding value, to invest in the business, to look for operating improvements, to change the CEO after the deal, and to reduce costs.

Firms founded by general partners with operational backgrounds have investment strategies that fall in between the other improvements, to change the CEO after the deal, and to reduce costs.  Firms founded by general partners with operational backgrounds have investment strategies that fall in between the other two groups.

These results, while preliminary, do seem to indicate that career histories of firm founders have persistent effects on private equity firm strategy. The strategies identified for private equity firms clearly align with the firm founders careers.”

Overall, the HBR study confirms the basic strategies PE firms have for adding value to the companies they invest in: aligning incentives, changing management or the governance structure, and looking for operational improvements.

 

OUR EXPERIENCE CAN HELP …

If you represent a PE firm looking at a company, or a company considering private equity, perhaps our experience on both sides of the equation can be of assistance.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

The Impact of Politics on Small and Mid-Sized Business

 

Changes in tax and business regulations that occur due to the political climate at any given time can have a huge impact on businesses and can even be the difference between their success or failure.

Because small and mid-sized business are in the front lines of commerce, they’re also among the first in the economy to feel the effects of delayed growth or public policy that’s unfavorable to business owners.

This requires business owners to be keenly aware of how the laws legislators pass will affect them, and it’s also why it’s important for them to be politically active for candidates who are aware of and prioritize the needs of small businesses.

 

SHARING POLITICAL ASSOCIATIONS …

However, it’s often best for business owners to keep their political associations private rather than share them on behalf of the business – especially if those political views are particularly alienating to customers.

It’s not uncommon for consumers to take issue with businesses who are openly supportive of political candidates or stances they disagree with, which could cause some customers to become biased against your company and even leave you bad reviews online.

This could negatively impact a business as 88 percent of consumers are influenced by online reviews.  Instead of openly criticizing political decisions that are affecting a business, try to be diplomatic about current events if speaking as the business owner.

 

 

A SHARP DRAWBACK …

Due to political prospective in financial institutions, smaller businesses reported that major sources of credit including credit cards and bank loans drew back sharply last quarter, according to results from the Q3 Private Capital Access Index (PCA Index) from Dun & Bradstreet and Pepperdine Graziadio Business School.

More businesses reported they were unable to secure credit from 14 of 17 lending categories measured including bank loans, credit cards (personal and business), and credit unions.

The number of businesses that were able to secure a loan from a traditional bank declined 41.5% quarter over quarter, with 31% of businesses reporting that they were successful securing a bank loan as a source of funding compared to 53% the previous quarter.

Trade credit – a common lending practice in which businesses agree to exchange goods without paying cash up front and the supplier is paid at a later scheduled date – also dropped significantly from 65% of business reporting success in Q2 to 43% reporting success in Q3.

Successful loans from credit unions also dropped 39.2% from 51% of businesses reporting financing success in Q2 to 31% reporting success in Q3 2019.

 

DECREASES WITH FIRM SIZE …

The variance of both profitability and growth decreases with firm size.

The second key source of divergence is that smaller enterprises have a lower probability of survival than larger enterprises. 

In a normally functioning financial market, some of these differences should be reflected in higher interest rates or less favorable terms of debt financing.

This general observation, as well as the following points, should be considered in the design of policy responses to the needs of Small and Medium Sized Enterprises (SMEs).

> Financial institutions assess smaller and medium enterprises as being inherently riskier.

> Larger firms usually comply with higher disclosure requirements to a greater extent than SMEs because of their access to a broad range of external funds (including bonds, equity and loans). Financial institutions charge higher interest rates to SMEs than to bigger companies in order to compensate for the higher costs of information collection, the smaller volume of external financing and the greater risk of failure.

> For many existing SMEs “insiders” (the entrepreneur, management) have better information about the expected profits of activities than external financial institutions. This lack of information leads to higher market rates to compensate for risk which may crowd out low risk, low-return borrowers, leaving a relatively higher number of high risk/return borrowers in the market. Charging higher interest rates may therefore not be in the interest of banks as low-risk borrowers — those most likely to repay loans — are driven from the market.

>  In the case of new enterprises or activities, outsiders (experienced bankers or other specialized financial intermediaries) can, in many cases, better assess the risks involved than relatively inexperienced “insiders”.  A specific disadvantage of young firms is that they cannot point to credit histories which provide important signals and help facilitate access to debt financing.

> Lending to SMEs is more likely to be based on collateral than is the case for loans to larger firms. This may lead to situations in which lending is not based on expected return but rather upon access to collateral. On the other hand, collateral reduces or eliminates contract problems such as “moral hazard” and “adverse selection”. Many SMEs lacking access to “good collateral” suffer from credit rationing.

 

WHEN YOU NEED FINANCING …

Uncertain regulations, changing tariffs, shifting environmental regulations and employment rules and new tax laws, all combine to have impact on small and mid-sized businesses.

And, as demonstrated above, where all of these uncertainties come together is when businesses need to obtain financing.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

A New Breed of Space Cowboys

 

Our latest blog comes to you with the assistance of Charlie Perer who is co-founder and head of originations for SG Credit Partners. Charlie, thank you for letting us integrate your thoughts into our blog.

Clint Eastwood starred in the classic year 2000 movie, Space Cowboys, about a retired astronaut who, along with his colleagues, was sent back to space to fix a satellite he helped build in the 1960s.

It turned out (in the movie) that NASA had no one around with any knowledge of the dated technology built into the satellite, so they had to turn to a retired astronaut to solve the problem. The importance of this particular satellite was that it was carrying an old nuclear warhead at risk of detonating.

 

FLASH FORWARD TO 2019  …

Flash forward to 2019 and one could argue we are dealing with the same crises in the field of special assets. The good battle-tested professionals who were in their 40s and 50s during the 2008 downturn are now in their 50s and 60s and thinking about retirement or joining a more lucrative turnaround firm.

This combined with banks focused intensely on their expense ratios as mandated by Wall Street and the slimming down of non-revenue producing divisions, has a created a dearth of experienced special assets professionals.

 

FEWER WORKOUT PROFESSIONALS …

It’s easy to see why banks are holding on to assets and trimming expenses to maximize profits while they can, but it’s a clear risk to do so at the expense of your front line of defense – professionals skilled in workouts.

Rather than one proverbial satellite, the nation’s banks are dealing with the equivalent of a watch-list of marginal credits and a bunch of space cowboys – professionals who are at or nearing retirement or worse have been downsized as part of cost cutting.

Try calling the workout departments of big and small banks and ask them off-the-record whether they are prepared for the next downturn.

The answer is no.  It’s a hard job that requires on the job training and a unique set of qualifications – knowing when to use the hammer versus the velvet glove; knowing when to exercise remedies versus judgement and patience.  Banking is at the end of the day a local and regional business – meaning whatever experience a borrower has on the way in or out will surely be communicated to their respective communities.

 

A UNIQUE SET OF QUALIFICATIONS …

Knowing how to solve the problem for the bank in getting its loan returned and creating a reasonable experience for the borrower often takes an experienced third party. 

As Charlie points out, it takes training and a unique set of qualifications. In many cases, banks, with a need for dealing with problem loans, transfer bankers from other banking areas into special assets.

Like any game, it takes time to learn the rules, and that is where a trusted middleman can be of help to both the lender and borrower.

We work with the bank to maximize their return on difficult loans and with companies to minimize the pain. When approaching a lender with a problem loan, it’s important to remove the emotion in a difficult situation. And most importantly, to never make commitments to a lender based on speculation and hope.

 

HIGHER RISKS & LOOSER LOAN STANDARDS …

According to the New York Times, loans to companies with large amounts of outstanding debt – known as leveraged lending – grew by 20 percent in 2018 to $1.1 trillion, according to the Fed’s twice-annual Financial Stability Report.”

There is no arguing that credit standards have loosened (both bank and non-bank) over the past few years and banks have fought bitterly for assets.

The result is that while the economy is by all means still thriving, the banks have just booked significant assets with higher risks, looser standards and lower rates.

There is going to be a real leverage epidemic in the next downturn and the resounding theme seems to be that bank management seems to think allocating staff with commensurate experience will be easy to do when many of their most experienced staff have been downsized, are on the verge or retirement or have found more lucrative consulting work.

Each bank should be asking themselves what their plan is for their workout department and start checking where their space cowboys are today.

 

 

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

A Day to Remember

 

As we return from vacation, our initial blog is coming out on September 11. Mike Flynn, the publisher of the Puget Sound Business Journal for more years than he’ll admit, now writes a blog about current events in the Northwest. His remembrance of an article written a few days following the September 11th attacks is so important in light of current events that we wanted to share it with all of our readers.

THANK YOU MIKE …

Thank you, Mike for reminding us what this day means.

(The following article, written a few days after the tragic 2011 September day that has become etched forever in our minds as 9/11, was a reporter’s wrap-up of the grief that citizens of every country shared in our behalf. The piece, written by a former, now late, United Press International colleague named Al Webb from his post in UPI’s London bureau, was first shared in The Harp on the 10th anniversary of that day and again on the 15th anniversary. Now it has become my annual reminder of that display of shared pain out of a sense that it deserves, or rather requires, being remembered.)

LAST VIEW FROM THE TOP …

Last View From The Top from grover Massenburg on Vimeo.

THE ORIGINAL ARTICLE …

LONDON (UPI) — A small girl with a Cockney accent shyly waved a tiny American flag, and a queen brushed away a tear.

In a Scottish town that has known its own tragedy, a lone church bell tolled. On a German river, foghorns sounded a low moan.

Across countries and continents, waves of sympathy for a nation in anguish rolled on. A young woman in a Kenyan park wept over the sad headlines in newspapers spread on the ground. A one-time terrorist donated blood for the victims. Hundreds stood in line in cities from Dublin to Moscow to sign books of condolences.

 

A WORLDWIDE OUTPOURING OF GRIEF …

2,977 people were killed that day

And over the outpouring of grief and mourning for the lives lost in the boiling flames and rubble of the World Trade Center towers and a wing of the Pentagon, time and again came the strains of “The Star-Spangled Banner,” sometimes in places where it had never been sung before.

In a gesture reminiscent of John F. Kennedy’s “Ich bin ein Berliner,” symbolizing his solidarity with another troubled people a half century ago, the Paris newspaper Le Monde perhaps summed it up best: “We are all Americans.”

In London, where the little girl with the funny accent and her American flag pressed her damp face against the gates, the band performing the traditional Changing of the Guard at Buckingham Palace suddenly did something it had never done before — it struck up “The Star-Spangled Banner.”

For 45 minutes, the Mall in front of the palace became a little piece of America for hundreds of its citizens who were there because there were no planes to take them home. And the band of the Coldstream Guards played on.

As tear-stained faces lifted and sang along, as Americans and British and other nationals waved Old Glory, the marches rolled — “The Liberty Bell” after the national anthem, followed by “The Washington Post March” and “Semper Fidelis” and finally, heart-rending, “When Johnny Comes Marching Home.”

 

800 MILLION PEOPLE & 3 MINUTES OF SILENCE …

What the Coldstream Guards had triggered was the greatest mass demonstration of grief in Britain since Princess Diana was killed in a car crash four years ago. 

And as with Diana’s death, a carpet of flowers, children’s toys, poems, letters, all illuminated by tiny candles, built up this time at the fortress-like U.S. Embassy in London.

Amid the hundreds of bouquets, a single American flag was wrapped around a tree. One woman pressed her tear-dampened lips to its fringe in a soft kiss.

The sweeping tide of mourning reached its crescendo at 11 o’clock Friday morning when Britain, France, Germany and scores of other countries in Europe, Africa and Asia went silent for three minutes, in honor of the innocent dead in America.

In Paris, the elevator at the Eiffel Tower stopped halfway to the top. Buses, trams and cars halted in their tracks across the continent.

In Spain, more than 650 city and town halls became gathering centers for tens of thousands who bent their heads in silent prayer — and then, at the end of the three minutes, they lifted their eyes and applauded in that people’s traditional tribute to the victims of terrorism.

On the River Elbe leading into Hamburg, ships flew their flags at half-mast. The minutes of silence crept by — and at the end were broken by the sound of a thousand foghorns rolling across the water into the city’s very heart.

In Lockerbie, Scotland, there was no applause, no singing, no bands, only the ringing of a single church bell and the flutter of flags at half-mast. This is a town with singular links to America, forged in a terrorist attack in the skies 13 years ago.

In all, according to an estimate by The Daily Telegraph newspaper in London, some 800 million people across Europe joined in the three minutes of silence.

 

INTERNATIONAL UNITY …

At Berlin’s Brandenburg Gate, once part of a dividing line between freedom and tyranny, a crowd of some 200,000 — among them Germans whose relatives had died in terrorist attacks — gathered beneath a black banner bearing the words, “We Mourn With You.”

In Paris, crowds jammed the Place de la Concorde, itself a symbol of reconciliation, while church bells rang for five minutes before the silence.  In the government’s Elysee Palace, “The Star-Spangled Banner” rang out, while over the French air waves, radio stations played John Lennon’s “Imagine.”

The bankers of Switzerland are not noted for their sentimentality, so they dealt in their own currency.  At the end of the three minutes of silence, they announced they were donating more than $500,000 to the families of the victims of the atrocities in America.

In Belfast, the bullets and bombs of Northern Ireland’s own form of terrorism, known as sectarian violence, went silent as tens of thousands from both sides of the divide — Roman Catholic and Protestant – gathered in front of a makeshift stage at City Hall, to stand in silent tribute. It is a city that knows the heartache of terrorism. “We have suffered for 33 years,” said Betty McLearon. “People here have to be admired for the way they can cope with it. It will take the people in New York a long time to get over this.”

In Moscow, the Russians observed a minute’s silence as they laid wreaths and floral tributes outside the U.S. Embassy, once a symbol of the Cold War. Thousands of Muscovites lined up patiently to sign books of condolences.

In turbulent Israel, a nurse gently inserted a needle into the right arm of Yasser Arafat, himself a one-time terrorist who is now head of the Palestinian Authority. In a demonstration of support, he was donating blood to help the American injured.

Lloyd’s of London, the insurance market based in the British capital and one of several insurers of the World Trade Center, rang its Lutine bell and observed a minute of silence in memory of the dead in America — some of them in the several broker offices Lloyd’s has — had — in the WTC.

 

THE QUEEN BEGAN TO SING …

Back in London, the minutes of silence were followed by a service of remembrance in the capital’s majestic St. Paul’s Cathedral, led by Queen Elizabeth II herself.  In the audience of 2,400 inside, Americans hoisted the Stars and Stripes for the rest of the world to see via television.

Outside the cathedral, the tens of thousands who could not get in waved their own tiny flags and listened over the loudspeakers that carried the words and music for blocks around. The cathedral’s huge organ rumbled into life, to open the service, appropriately, with the American national anthem.

Then something happened that has never happened before, certainly not in public and doubtless not even in private. Softly, the queen began to sing “The Star-Spangled Banner.”

Now, the British monarch does not “sing” national anthems. When they are played, she never even opens her mouth. Until now.

But Queen Elizabeth sang it all, this song whose words were written 187 years ago during Britain’s last war with her lost American colonies, through the final words, “O’er the land of the free, and the home of the brave.” With the last note, the queen gently brushed away a tear.

(Al Webb died in January 2015 at the age of 79 after a UPI career that ranged from the civil rights struggles to the battlefields of Vietnam to the Houston Space Center. But he could well be best remembered for this piece of moving reportage whose rereading stirs a compelling question about whether the global regard for us that the outpouring of affection evidenced remains our national treasure. Or has it become a squandered legacy.)

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

It’s That Time of Year …

 
 

As we have done every year, it’s time for our vacation for our semi-weekly blog.

We want to express our deep appreciation to all of you who read our blog and make comments and suggestions.

We will be back in September with new thoughts regarding business and finance. We want to wish everyone a wonderful August and we look forward to seeing you next month.

For our current and prospective clients, although our blog is taking a vacation, Revitalization Partners will be working to assist you with your business issues.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.