- Identify each piece of business currently awarded to bank-group members.
- Identify all fees associated with bank services. Ask your bankers about the minimum capital-allocation requirements for credit and credit-related products such as loans, securitizations, and leases.
- Through these discussions with your bankers, develop assumptions regarding standard margins on each fee-based service.
A typical CRORC model contains a separate tab for each bank along with a summary that compiles key statistics for comparison. Each bank’s tab should itemize the individual products and services along with the associated revenue, margin, and regulatory capital allocation. Tabs structured in “trailing 12 month” and “forward 12 month” formats can help CFOs and treasurers analyze potential changes. —Randal Rombeiro
Services to Think About
Beyond credit facilities, cash management, and foreign-exchange transactions, what should be included in a return model? A different way to ask this question might be, “What am I currently buying from a nonbank provider that could be sourced within my bank group?” Below are some additional items for consideration. —R.R.
Accounts-receivable or -payable outsourcing
401(k) / pension-plan administration
Commodity and energy hedging
Merger and acquisition fees
When building a common return model:
Be realistic: Borrowers with larger bank groups are more likely to benefit from a common return model, as are those from troubled industries.
Be open: Many bankers are still hesitant to disclose product and service margins but are more likely to oblige if they understand the reason. Borrowers, in turn, should avoid using this information simply to squeeze a percent or two out of disbursement costs.
Change your style: Consultants say that using a return model is part of building a mutually beneficial vendor/supplier relationship with banks. This may mean mending fences and a change in style if past relationships have been combative or adversarial.
Look for more business: Companies should examine their operations for additional business that could go to the bank group (see “Services to Think About,” above). Centralizing bank product and service procurement — a tactic used by companies such as Fidelity — may help.
Look for future business: Evaluate the company’s strategic plans for future product and service needs (such as M&A, share repurchase, or new hedging programs).
Ask banks for ideas: Odd as it seems to ask for sales pitches, banks are likely to view interest in other products as a sign of good faith.
Consider foreign banks: Varying tax rates and other differences may make it easier for overseas banks to make their margins on certain types of business. —R.R.
Adjusting Credit Ratings
Default probabilities vary for companies with the same credit ratings. Below is the range in basis points (bps) that Moody’s KMV, a division of Moody’s Corp., uses to calculate default probability, given a firm’s rating.