Top Tips for Getting Credit

The key takeaway: do your due diligence on the shrinking universe of lenders as early as you can. And maybe buy some derivatives or credit insurance to make you look less risky.

These are days of great uncertainty for companies wanting to hang on to their ability to borrow money. Clark D. Griffith, a vice president and senior relationship manager with UnionBank in Los Angeles, says that one of the bank’s clients, a public company that had a credit facility backed by a syndicate of many lenders through June 2011, recently made “a strategic decision” to continue that arrangement for just a single year. And it cost the company a pretty penny.

What the borrower did was to strike an “amend and extend” arrangement with the syndicate, changing the terms of the deal in midstream and putting down extra money to extend it. To push its borrowing capacity out to 2012, the company cashed in its then-current interest rate of the London Interbank Offered Rate plus less than 1% of LIBOR for a rate that was “north of 3% of LIBOR,” according to the banker.

Speaking during “Where to Get Credit Now,” a panel at last month’s CFO Rising West conference, Griffith used the example to illustrate the world of whopping amendment charges, closing fees, and increased pricing that corporate borrowers — many of which are facing imminent loan maturities — are running into in today’s credit markets. In the current climate, finance chiefs are under intense pressure to negotiate extensions, renewals, or new credit facilities well before their current transactions expire, panelists agreed.

Another speaker, Gary Rosenbaum, an attorney with McDermott, Will & Emery who counsels both borrowers and lenders, advised corporate finance executives: “If you have a loan facility that’s coming due in the next year, do the lap of the smaller universe of potential lenders — and get out early.” Citing such developments as the recent spate of big bank mergers and the disappearance of collateralized loan obligations, which once backed the bulk of syndicated loans, he noted that “the world of lenders has shrunk.”

At the same time, corporate executives need to take a close look at their prior arrangements with banks because the economy has undergone a sea change in the past year, according to the attorney. The executives should figure out if the covenants on three-year or five-year credit facilities arranged before the financial crisis are still accurate. If they’re not, executives might be able to avert disaster by pointing out to lenders conditions that, for instance, might push the company into default, Rosenbaum said.

Another takeaway: finance executives should gain a good grasp of the pressure their lenders are under in order to know what borrowers should expect when seeking credit. Credit officials, said Griffith, are not “big bad evil entities in a private room deciding whether to do a deal or not. These credit approvers are the same people that have lost their consumer confidence and are not spending as much money on cars or TVs. They’re a little bit more skeptical on the credits they’re underwriting. It’s very difficult for them to understand where the economy is going. So they want a lot more attention to detail and a much clearer, transparent understanding of the borrower.”

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