To hear John Walenta describe it, now is a “very good time” for CFOs to ask their bankers for a loan.
“By and large, the environment is pretty good,” said Walenta, a partner in the corporate and institutional banking practice of bank adviser Oliver Wyman. “The average deposit-taking banks are awash in deposits and are looking for opportunities to lend, principally in the middle- and upper-middle market,” he said during a panel discussion at the CFO Core Concerns conference in Baltimore on Monday.
Markets are stabilizing, pricing has come down from postcrisis levels, and terms are easing, added Walenta. “The worst is behind us for the credit markets.”
Perhaps. “It’s not as bad,” mused Gary Shell, CFO and treasurer of EMS Technologies. “It’s better than a stick in the eye.” Like many CFOs, Shell, who also spoke on the panel, is willing to concede that the markets have improved from their near-frozen state in early 2009, but he still hesitates to declare the credit markets a friendly place for a middle-market company.
And no wonder. The topic of the panel discussion was which financing sources to tap in order to finance growth. But according to the latest CFO Magazine/Duke University Business Outlook Survey, some 30% of companies were forced to curtail capital spending in the past year because of funding difficulties, and fewer than a quarter of CFOs at companies with less than $500 million in revenues say it is easier to borrow now than it was in the fall of 2009. Indeed, while companies with more than $1 billion in annual revenues have seen borrowing becoming easier, CFOs at the majority of those smaller companies say little has changed in the past year.
With $400 million in revenues, EMS Technologies was fortunate to renew its credit facilities in January 2008, before the worst of the crisis unfolded. “We got a great deal,” said Shell. “We would not want to do anything to lose that.”
To that end, he noted, he spends far more time managing the relationship with his company’s three-bank lending club than in the past. “We communicate in a much more frequent way; more like an investor than a creditor,” he explained. That also means spending more time listening to pitches for the banks’ ancillary services offerings, as well as keeping up with the many changes in relationship managers resulting from turnover and mergers.
“The different faces alone meant we had to do more communication,” said Shell. “We wanted to make sure the banks were calm and had no worries when we wanted to make changes or needed minor covenant waivers,” he added. “We don’t want any surprises for them, so that when an opportunity comes along, they will be there.”
Walenta of Oliver Wyman said Shell’s description of the relationship would come as little surprise to many of his bank clients, adding that it is only recently that banks have begun to fully understand that middle-market and upper-middle-market companies are good clients. “There is a broader understanding that these [companies offer] good risk-adjusted returns,” he said. Walenta, too, identified turnover among relationship managers as a problem in corporate banking relationships.
Another panel member, Constellation Energy CFO Jonathan “Jack” Thayer, also said he “invests significant time and energy” in banking relationships. “I, too, sit though a lot of presentations about things we might do with our partners,” he said, echoing Shell’s comment about pitches for ancillary services.
Constellation Energy, a $20 billion company, has seen firsthand the danger of losing access to capital. In September 2008, Constellation almost went bankrupt “because of our heavy reliance on liquidity products,” recalled Thayer. The energy company was rescued by a $1 billion investment from Warren Buffet’s MidAmerican Energy, and by the subsequent sale of half of its nuclear-power business.
Today, said Thayer, the company is sitting on $1 billion in cash. “We see the capital markets being very attractive right now, but unfortunately we have no need to access them,” he said. Ironically, the loose, “covenant-lite” lending of the precrisis credit bubble has also kept some potential acquisition targets from running afoul of their banks, delaying those acquisitions until their funding comes up for renewal.
This article was reported from the floor of the CFO Core Concerns conference. For more information on upcoming conferences, click here.