The Story of a Problem Loan

 

Recently Revitalization Partners was contacted by a company that needed help with their commercial loan.

The lender had, in addition to the original loan, issued three forbearance agreements, none of which the borrower had been able to comply with.

At that point, the latest forbearance agreement required that the borrower bring in a Chief Restructuring Officer to assume responsibility for the operation and financial performance of the company.

While this borrower was having problems with the lender, it is fair to say that the lender was also having problems.

 

PERSONAL & FAMILY ACTIVITIES …

Like many owners of small businesses, the borrower tended to use the business as a piggy bank.  

In addition to the normal business activities, a significant amount of money came out of the company for personal and family activities. To avoid income tax, this money was carried on the books as a loan to the borrower. By the time it reached almost a million dollars, it was clear that the funds were never going to be paid back.

By the time this loan reached the third forbearance agreement, there were some very unusual covenants associated with the agreement and loan.

The lender required that the company maintained a “joint account” with the lender. All funds were supposed to go into the account and the lender would approve checks. Therefore, the borrower ended up writing several bad checks as he was never sure which checks would get approved.

 

$ 250K EXIT FEE …

While the lender wanted to get out of this relationship, the cost to the borrower had escalated to a $250,000 “exit fee” in addition to paying off the original loan with interest due. 

In desperation, the borrower had opened a new account into which he deposited funds to pay for items that the original lender would not approve. 

As this was a violation of both the loan document and all the forbearance agreements, the borrower was in violation the second he signed the new agreement. 

 

Neither side trusted the other at all.

 

How did we get here?   

It began with a successful entrepreneur who ran a unique business for a number of years.

Then, due to a new product launch that went awry , he had a bad year and got into trouble with his bank.

The bank wanted him out, but given the short-term track record, he didn’t know where to turn.

 

 

A FRIEND OF THE FAMILY INVESTOR …

Then, a friend of the family “investor” offered to purchase a reasonable percentage of the company for enough money to settle with the bank. 

And since it would be equity, it would not have to be paid back.

While the “equity documents” were being drawn up and the borrower was negotiating with the investor, the investor suggested that, since the borrower needed the funds NOW, they just draw up a convertible note to move forward.

The borrower received his money, he made use of it and all was fine until the “investor” changed his mind and wanted his funds back. 

The borrower didn’t have them and after some unpleasantness, the investor went to court and got a judgment against the borrower.

 

AND NOW A LOAN BROKER …

At the same time, the borrower had turned to a loan broker that he found on the East coast. 

While a loan broker is supposed to distribute your application to several different lenders and to educate you about the pluses and minuses different lenders and loans, this broker found only one, the lender with which the borrower was having so many problems. 

The broker charged a reasonable fee of 5%, although the agreement did not specify if he received any further fees from the lender. 

The agreement was supposed to remain in place for only two months, however it renewed automatically if not cancelled and by the time in 2018 that all of this occurred, had been in place for about 3.5 years.

 

PROUDLY NEVER USED AN ATTORNEY ???

The other factor related to how we got here is the fact that the borrower had, over the life of his business, had never used an attorney.  And he was proud of that fact, having negotiated and signed every document himself. 

As a result, the loan documents, the “investor” agreements, etc. were all the product of his own knowledge.

At the time Revitalization Partners became involved, he had the lender insisting he execute the current forbearance agreement and refusing to authorize the retainer unless it got signed, while at the same time insisting that he get help.

There was already a judgment against him and two others ready to be filed. He had executed multiple personal guarantees and a stock pledge of the company’s equity.

 

AND A LACK OF REALISM …

Given the situation, we strongly suggested that he entered a receivership as the company had significant value when protected by the court.

He resisted as he believed that a Chapter 11 would allow him to end up keeping his company although he had no ability to fund debtor in possession, no ability to get a bankruptcy plan approved and would have to manage a personal insolvency simultaneously.

Given what we viewed as a lack of realism related to the situation, we declined to go forward.

No one, no matter how talented, can know everything. 

And financing is one of those areas where experience and knowing the lenders counts.

For example, Revitalization Partners has successfully helped 100% of the companies we have agreed to work with to get new loans.

And to avoid any conflict of interest, we do not accept a commission from either the lender or the borrower for that service.

 

 

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.

Civility in the Workplace and in Life

 

As some of you know, as one of the Principals of Revitalization Partners, I commute to work by air; a 65-mile flight by scheduled airlines, to and from the San Juan Islands.

Over time, friendships have developed with other regular travelers on the same route.

In waiting for the plane to depart, a conversation was started between the myself and another passenger whom is also a regular commuter.

The quiet discussion was about the latest political hot button; the separation of families on the Southern Boarder.

 

HE MENTIONED HIS POLITICAL PERSUASION …

In our personal conversation, the other passenger mentioned his political persuasion.

Within seconds, a woman who overheard the conversation began calling him names and commenting to anyone within hearing, his political persuasion, along with several strongly negative comments related to that.

As we boarded the plane, which carries only 9 people, she continued her comments and included me because I must have the same political view as I was a friend of his. 

My thought was: What would it be like to have to work with that person?

 

TREATED WITH RESPECT …

We all come to work and want to be treated with kindness and respect. 

However, a study done by Christine Porath, a professor of management at Georgetown University shows that over 98% of workers have experienced rude behavior and 99% have witnessed it. 

And, unbelievably, the situation is getting worse.

According to a 2016 poll, 62% of employees were treated rudely at work at least once a month.

Since the poll’s launch, rude behavior has increased at an increasing rate; which means that every year, the chances go up that company leaders and employers are being dismissive, demeaning and just plain rude to one another.

 

 

LEFT BECAUSE OF VERBAL ABUSE …

In an assignment where a member of Revitalization Partners is serving as interim CEO, the Board of Directors felt the need for new management because key people had left the company due to the verbal abuse of certain key managers and the senior management was so busy infighting that they could not or would not address the problem.

The need for a new CEO came about more urgenly because of a major verbal confrontation between senior managers…..in a board meeting.

The impact of any rude behavior in an organization is significant.   One recent study found:

• 78% who experience uncivil behavior from management or colleagues become less committed to the organization
• 66% suffer a decline in overall work performance
• 47% deliberately spend less time at work
• 25% take out their frustrations on customers

 

RUN YOUR OWN NUMBERS …

You can run the numbers for your organization. 

Are these impacts that you are willing to simply accept as the cost of doing business?  The company that Revitalization Partners has stepped into has experienced revenue and profit declines for the past three years.

Things must change rapidly, including how people treat one another.

What are the changes that impact civility in both in and out of the workplace? The first is to define civility. This means establishing specific principals you want employees and management to follow in how they treat others.

Engage them in discussions of what civility means and what the norms they want in their organization. What behaviors are they willing to hold themselves and others accountable for.

 

DON’T ASSUME EVERYONE INSTINCTIVELY KNOWS …

Don’t assume that everyone instinctively knows how to be civil; many people, especially those new to the workforce, may have never learned the basic skills.

It’s not enough to define the norms, employees need to learn how to understand and respect them.

It’s important to set a new standard for the organization.

Everyone in the organization has to understand that civility is a collection of positive behaviors that produce feelings of respect, dignity and trust.

Those behaviors must be rewarded and supported while negative behaviors are addressed quickly.

 

AS IMPORTANT AS OPERATIONAL RESULTS …

Make the standard of civil behavior as important as organizational results.

Work to change the core drivers of the organization.

Studies have shown that when management and employees understand that how they achieve results is as important as the results itself, the resulting change in behavior comes from within the organization.

When Revitalization Partners assumed the responsibility of the interim CEO of the organization, we brought the management team together and clearly stated that the very uncivil behavior of the past would no longer be tolerated. 

It was an open and difficult discussion.

 

MODEL THE RIGHT BEHAVIOR …

At one point, a senior level manager who, by his own admission, was responsible for much of the uncivil behavior, stated that he was responsible for over one third of the company’s revenue.  

We pointed out that we would rather have a smaller downsized company in which everyone was treated with respect, rather than one of the current size where fear was the motivating factor.

When recently complementing him on the change in behavior that we had seen, he commented that “I heard you about the smaller company and I believe what you said.” 

One of the most crucial thing a manager can do is to model the right behavior. 

Even if you establish expectations, define civility in your organization and provide coaching, you can’t expect the team to treat one another with respect if you don’t. Walking the talk is critical to any managerial success.

 

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 Forbearance Agreement: What Does It Mean?

 

When a borrower defaults on its loan agreements, a lender may (among other options) sue to foreclose on its collateral and collect from borrower, or agree to amend the loan documents, or enter into a forbearance agreement.

If the borrower can convince the lender that, within a reasonably short time, the borrower can cure the defaults and can perform or observe such new conditions as the lender may require in exchange for waiting, a forbearance agreement memorializing such new arrangements may be entered into by the parties.

 

IT’S NOT THE SAME AS A …

A forbearance agreement should be distinguished from an amendment agreement under which the terms of the original loan are changed. Suppose that the borrower fails to repay the entire principal due on the maturity date of a loan.

In response, the lender could agree simply to give the borrower more time to repay the loan – by amending the loan agreement and promissory note to extend the maturity date to some future date.  By amending the loan agreements in that manner, the lender would effectively eliminate the default and the lender’s rights arising from the default.

Thus the lender would no longer be entitled, for example, to accelerate repayment or to charge a higher, or “default rate” of interest as a remedy for the (now wiped clean) default.

 

THE BORROWER ACKNOWLEDGES …

In a forbearance agreement, the borrower acknowledges that it has defaulted on its obligations, while the lender agrees that it will refrain from exercising its remedies for such defaults as long as the borrower performs or observes the new conditions set out in the forbearance agreement, and, by a certain date, cures the defaults.

A forbearance agreement entered into after a maturity date default would typically provide that the lender will not exercise its rights arising from the default provided the borrower pays the lender the loan principal in installments over a stated period of time, often at a much higher rate of interest than under the original loan agreements.

The lender may wish to impose additional conditions, such as requiring borrower to meet new or enhanced financial covenants or to pledge additional collateral to secure its repayment obligations.

If the borrower fails to live up to the terms of the forbearance agreement, the lender may sue the borrower for a breach of that agreement and may also exercise any of its rights under the original loan agreements for the original defaults.

 

BEFORE ENTERING INTO ONE …

Before entering into a forbearance agreement, the prudent lender will conduct a thorough due diligence review. The location and financial condition of each non-lender party should be re-examined.

A lender should verify that all financial covenants and ratios are in compliance; excepting, of course, non-compliant covenants and ratios set forth as defaults in the forbearance agreement.

A lender should obtain new tax, lien, and judgment searches against the borrower and guarantors, and, if anything adverse is identified, take appropriate steps to remove or mitigate risks thus raised.

The lender should conduct an on-site audit of all collateral to verify existence and location. The lien search should confirm the priority and extent of the lender’s security interest in the collateral. If the collateral is real property, the title insurance should be updated to ensure no adverse liens or encumbrances exist.

 

CONTAINS SOME “KEY” PROVISIONS …

A well-drafted forbearance agreement will contain a number of key provisions:

First, the agreement must recite with specificity the indebtedness owed and all of the defaults that the borrower and the guarantors have committed. The recitation should include both monetary and non-monetary defaults. In many ways this aspect of the forbearance agreement is tantamount to a borrower’s confession of judgment.

The agreement should provide that: (a) the borrower and guarantors admit to their defaults; (b) the borrower and the guarantors have no defense against full payment of the indebtedness; (c) there is no material issue of fact as to the fact of such defaults; and (d) a summary judgment against the borrower and guarantors in the amount of the unpaid indebtedness is warranted and appropriate. A fundamental premise of the bargain in a forbearance agreement is that, should the borrower fail to live up to its obligations under the forbearance agreement, it is reasonable for the lender to have no further delays or other significant costs in obtaining the necessary judgment against the borrower and guarantors.

Second, the forbearance agreement should state that the lender’s forbearance is conditioned upon, among other things, the borrower and guarantors strictly observing and performing all of their obligations under the loan agreements other than those relating to the enumerated defaults. 

Any new default under the loan agreements must constitute a default of the forbearance agreement, which would give the lender the right to terminate its forbearance.

Third, if the loan agreements include any guaranties, the guarantors must each be a party to the forbearance agreement, which must provide that the guarantors reaffirm their obligations under their guaranties, notwithstanding the forbearance or any alterations to the loan indebtedness.

Most well-drafted guarantees recite that changes to the terms of the guarantied indebtedness, including any forbearance, whether or not the guarantor consented to them, will not vitiate the guarantor’s obligations under the guaranty. However, courts often bend over backwards to construe strictly and limit a guarantor’s obligations, or even to excuse a guarantor when loan terms change, by applying vague principles of equity and fairness. To eliminate any risk of this, a prudent lender will require a guaranty reaffirmation in the forbearance agreement.

Fourth, the forbearance agreement should provide for a liability release of the lender by the other parties. The release should cover, at a minimum, any loss or damage arising from: (i) the forbearance agreement; (ii) the loan documentation; and (iii) any other dealings the lender may have had with the borrower or any guarantor at any point. The release should be given by the borrower and each guarantor.

 

GET EXPERT HELP IF NEEDED …

It is important to fully understand any forbearance agreement that the bank is requesting.  

In many cases, the situation has become so desperate for the borrower, they will execute any document to relieve the pressure from the lender.

As in the initial loan, it is important that the borrower ensures that they understand the new commitment and they are capable of remaining in compliance.

The use of an experienced business and contracts attorney and a qualified financial advisor is critical.

 

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 Danger of Inept Government

 

Once again as we sat down to write our semi-weekly blog.

We realized that one of the closest friends of Revitalization Partners has written his thoughts in a message that we believed everyone needed to hear.

So, with his permission, we are using his writing and integrating some thoughts of our own.

 

 

PUGET SOUND BUSINESS JOURNAL …

Mike Flynn was publisher of the Puget Sound Business Journal for 24 years.

Since his “retirement”, he has continued to help business through his weekly blog and by helping companies in all sorts of ways, including Revitalization Partners.

Given the activities we are seeing that represent an attack on business by the Seattle City Council, his thoughts become more significant daily.

 

SOME REALITIES WERE MISSED …

As reactions to the head tax the Seattle City Council imposed on the city’s largest businesses reverberate across the community, there are some realities that both supporters and opponents of the tax either missed or avoided but that may still be considered, particularly with a likely public vote in November looming.

Despite the extensive media and community groups’ comments and response to the tax, which is aimed at raising almost $240 million over five years toward dealing with the cost of housing and services for the city’s homeless, there were some issues and ideas possibly overlooked amid the heated exchanges between the two sides.

 

THE CITY’S NEW “HEAD TAX” …

One was the ongoing realization during the back-and-forth rhetoric and eventual compromise negotiated by Mayor Jenny Durkan that brought the per-employee tax down to a little over half the $500 per head the City Council wanted to impose, there was no mention of the city income tax now awaiting Supreme Court decision.

So Durkan, who in laughable understatement, said it was “a longshot” as she announced last December that she was going ahead with the appeal of Superior Court Judge John Rule’s decision that the tax was illegal, committed the city to pay attorney fees when we now know there are more pressing needs for that money.

Under the tax passed by the City Council last year then ruled illegal by Judge Rule.

Seattle residents would pay a 2 percent tax on annual income above $250,000, while married residents who file their taxes jointly would pay it on income above $500,000.

It might be expected that some business leaders might suggest “we’ll accept the head tax if you agree not to pursue the income tax idea.”

Obviously, many of those business leaders would pay in the tens of thousands of dollars if the income tax were actually imposed. That is if they didn’t decide to move from Seattle.

 

A POSSIBLE STATE INCOME TAX …

And as remote as the city’s chances of a favourable Supreme Court ruling are in this case, the fact is that at some point a Democratic governor and a legislature that has a sufficient Democrat majority is likely to enact a state income tax.

That would likely remove the current legal prohibition against a city imposing an income tax.

Negotiating an agreement in which the city would agree never to impose both an income tax and a head tax might be a protection against an even more business-challenging future.

 

NOVEMBER BALLOTT INITIATIVE …

But at this point, it’s obvious that business and other opponents of the head tax intend to put an initiative on the November ballot to have the electorate decide on the head tax.

Dozens of businesses, including Amazon, Vulcan and Starbucks, have already pledged more than $350,000 to a No Tax On Jobs campaign.

 

AN OPPORTUNITY FOR OTHER CITIES …

Meanwhile, Pierce County elected officials have stepped up to announce a sort of reverse head tax.

The group, representing a number of cities in the county, said the will be devising a plan to give businesses a $275 tax credit for each family wage job created in the county.

And, if successful, such a plan may be followed by other cities near Seattle.

Since the City Council and others are making it clear that the city’s ability to find the money to cope with the homeless crisis is a growing challenge, that issue should lead to a commitment not to waste money on other things.

And waste a significant amount of money they do.

 

WAYS TO WASTE MONEY …

What immediately comes to mind in that money-wasting category is the $250,000-plus the city is paying in legal fees to defend City Council member Kshama Sawant in lawsuits resulting from her intemperate and insulting comments towards those she happens to disagree with.

It’s “only” a quarter million dollars so far.

But statistics on costs of providing homeless services would suggest that those attorney fees for Sawant would provide for maybe 25 or 30 homeless peoples’ needs, including housing.

How about another initiative that would prohibit the city, which already pays for its own legal department, from hiring outside attorneys when a member of the City Council is sued, particularly when it’s within the council members’ power to avoid a suit by merely being careful about what comes out of their mouths?

 

AN OPPORTUNITY FOR OTHER CITIES …

And when the city wastes millions of dollars on bike-lane overruns and transportation-cost foul-ups, the reaction to the City Council needs to become:

“Your ineptitude just left dozens (hundreds) of people on the streets for another year.”

And continues to chase business to other areas outside of the Seattle City limits.

In remembering American History, it was the Stamp Act, which was the final straw for Colonists in their increasingly contentious relations with the King and Great Britain.

It led to the revolution.

And while it’s unlikely that the issues of one medium size American city will lead to a revolution, the ineptitude of the Seattle City Council is reflective of what has become the larger ineptitude of national government.

In the 1970’s, during a recession, there was a billboard that said;

“Will the last person leaving Seattle, please turn out the lights.”

If the city council continues to remain unfriendly to business, they’ll need their hands on the light switch.

 

 

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.

Competition in the Mid-Market ABL Space

 

As most of you know, we at Revitalization Partners generally write our own blogs. But when we see some insight that we think will be very valuable to our readers, we try and pass that along.

This article comes from Charlie Perer who is Head of Originations at Super G Capital and a member of its Credit Committee.  He is responsible for originating and structuring transactions across all loans products and corporate development initiatives. businesses.

 

A DEVELOPING BATTLE …

The past few years a battle has been taking place between the nation’s largest banks, regional banks and non-bank asset-based lenders (ABLs), all focused on $30-50 million ABL facilities.

This competition has pitted the big banks vs. the regional banks and a new crop of non-bank ABLs that were formed to serve this market.

 

A HYPER-EFFICIENT MARKET …

At the same time, a new crop of non-bank ABL firms emerged to go after the $3-10 million ABL facilities. The result is that today’s market is hyper-efficient when it comes to larger ABL facilities where banks are truly giving away money for free in return for deposits, treasuries and facilities of less than $10 million that bigger banks can’t serve.

The barriers to entry for sub-$10 million space are lower and competition for larger facilities is too crowded.

This intense competition and over-crowding has created a void in the marketplace for $10-30 million facilities with a real focus on $10-20 million.

There are four constituencies headed on a collision course right now: big banks, regional banks, large non-bank ABLs and smaller non-bank ABLs-with the $10-20 million facility size being the concentric circle.

These firms should each be put in distinct buckets.

 

THE “BIG 3” BANKS …

The “Big-Three” banks – Wells Fargo, JP Morgan Chase and Bank of America – have the scale, talent and capital to compete anywhere and anytime. The regional banks have the home-field advantage in their respective markets and deep-rooted relationships.

On the non-bank side, the bigger and smaller non-bank ABL firms have rarely crossed paths until each of their spaces-sub-$10 million and greater-than $30 million-have become crowded and difficult, with the banks riding out a long bull market.

The edict from Monday morning sales meetings across the country is simple-book assets at almost any cost. The economy is still great and regulation does not seem to be on the horizon, so make hay while the sun is out, as they say.

The natural solution is for everyone to go after the inefficiency, which is becoming more and more apparent.

 

THE NEW BATTLEFIELD …

The new competitive battlefield is really between $10 million and $20 million facilities. They are just big enough for the larger banks and non-bank ABLs to focus on, and still within reach of the smaller non-bank ABLs that want to separate themselves from their own competition.

The “Big Three” banks, meanwhile, are trying to understand how to serve this space. They have invested in platforms, back-office technology and systems; and they currently have capacity-human and financial capital-due to competitive market conditions.

Given this is the case, they are all strongly discussing how to serve this market-especially since they know the regional bank ABLs have been quite happy to book these assets.

 

IN A PARALLEL UNIVERSE …

In a parallel universe, there are clear battle lines being drawn in the ABL market, which is getting smaller with the recent bank acquisitions of Marquette, Crestmark and AloStar, and will probably continue to shrink even more.

This narrows the field of non-bank ABLs to a smaller number of independents. Ares, Encina and CIT Northbridge were each formed (or changed their strategies) to go up-market.  

Ares purchased First Capital for the human capital and platform and promptly directed themselves up-market, given less competitive market opportunity and the ability to take advantage of Ares’s balance sheet.   

Encina and CIT Northbridge were formed specifically to go after the larger non-bank ABL deals. These folks and a few others have proved formidable competition, which is why they have all been known to look down-market in their pursuit of growth.

It just so happens their smaller independent competitors are all looking up-market as a way to differentiate themselves and to grow assets given it takes the same amount of work to book a $5 million facility as it does a $50 million facility.   The sub-$10 million facility ABL competition is toughest because of the sheer number of players competing for the largest number of possible borrowers. 

Their average borrower borders on the cusp of transitioning from retail banking to business banking, and has real capital needs.   It’s not only competitive, but it’s time consuming to manage and monitor collateral.

 

THE BEST MARKET OPPORTUNITIES …

This is just another reason why the $10-20 million space contains one the best market opportunities across the country. This space is the heart and soul of business banks for the national and regional powerhouses. These companies are typically privately held and are able to draw on the full resources of their banking platform.

Each bank sells on platform and full-service offerings that are symbiotic. Banks have proven to be aggressive at keeping these clients.

The convergence of all these competitors is most likely going to create an over-lending situation in both larger (greater than $30 million) and smaller (less than $10 million) facilities.  

What’s unique and interesting about this perfect storm of competition is that it is pitting four distinct constituencies against each other rather than a few.  

The business size to warrant a $10 million to $20 million facility is optimized to attract a lot of attention. This will surely create an over-competitive situation, with availability being stretched and prices sure to drop.

 

WE HAVE SEEN FIRSTHAND …

Here at Super G, we have seen first-hand all the constituents mentioned above competing with each other. The market is ripe for competition. Smaller firms want the business and bigger firms can easily do a smaller deal.

This area is going to be the next battle zone for market share, given the other areas have been fought over to create this white space in facility size.

It should also be noted that some of this is defensive as we are all in a zero-sum game and the real constituents under attack are the business-banking groups throughout the country.

In some ways this has caused the business-banking groups to be aggressive with credit as it’s clearly a borrowers’ market. The issue they face is that borrowers will trade lax monitoring for more availability in a true ABL structure.

The ABLs across the country are all focused on the business-banking market. 

The commercial banks understand this competitive threat as it has dictated lax lending terms.

This is clearly going to change, and borrowers are going to be heavily marketed to by all aforementioned constituents.

So put your seatbelt on, because the intersection is going to get busy really fast.

 

 

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.

What Does Your Banker REALLY THINK?

 

We have written many blogs about banks, providing insights into their thought processes and approach to lending.

With that in mind, we thought it would be interesting to share information related to a quarterly survey conducted by Phoenix Management Services that may impact your business.

The survey, “Lending Climate in America” is administered quarterly to an array of regional and national lenders from various commercial banks, finance companies, and factors across the country.

The purpose of the survey is to gauge how they feel about the economy, lending practices and other related issues.

 

SURVEY HIGHLIGHTS …

The survey highlights several interesting points regarding where they expect their lending activity will come from over the next several quarters.

  • For example, over 50% of the respondents believe new loans will be driven by merger and acquisition, organic growth and business expansion.
  • Only 13% believe growth will come from business looking to refinance loans at a lower interest rate.

 

LENDER OPTIMISM?

Another interesting point relates to lenders’ optimism regarding the 2018 equity markets.

    > Over 60% of the respondents believe there will be modest single digit growth and

    > 12% believe there is room for double digit growth.

    > Virtually no lenders expect a decline in equity markets in 2018!

Lenders’ outlook on the US economy over the next six months improved over the past quarter.

Nearly 80% of the lenders surveyed believe the economy will perform at a B average, up nearly 10% points from last quarter.

On a longer-term basis, 53% of the lenders believe the economy will perform at a B average while 46% believe the economy will perform at a C average.  The combined group represents a 11% increase over last quarter.

 

WHAT ABOUT INTEREST RATES?

Lenders’ outlook on interest rates changed significantly, as 89% (up from 50% last quarter) believe that rates will increase by ½ % or more. The overall sentiment for loan structures (covenants, advance rates, etc.) changed significantly. 

Of those surveyed:

  • 17% will tighten their loan structures up from 8% percent last quarter.
  • And finally, the number of lenders expecting their loan losses to increase rose to 39% from 25% last quarter, reflecting a significant increase in their perception of risk.

 

A DICHOTOMY IN SENTIMENT …

The survey reveals a certain dichotomy in lender sentiment.  It ranges from being bullish on the economy and growth of new loans, to pessimism related to increasing interest rates and loan losses.

One might ask, “How does one reconcile these different viewpoints and what impact do they have on my business?”.  

The truth is, it often seems that lenders want the best of both worlds.

 

GROWTH vs. RISK …

They strive to take advantage of growth opportunities yet are still concerned with the risk associated with a highly competitive market.

This is especially true in this market, where lenders have a vast amount of lending capability that significantly outweighs demand.

Business owners must navigate this sentiment, particularly when they are looking to refinance or want to increase the size of their credit facilities.

 

OUR ADVICE IS …

Over the past couple of years, we have helped a number of companies refinance existing debt and have experience dealing with an array of different lenders.

Based on that experience, our advice is to choose your lender carefully.

Not every lender is right for every company. The market is very competitive; however, it is really important to understand if the prospective lender has the right loan structure, favorable advance rates and will stick with your company through thick and thin.

And if there is any question about how you should proceed, don’t be afraid to seek advice from a trusted advisor.

 

We specialize 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.