But CFOs have to be careful not to over-rely on this metric. “I wouldn’t tell you that a RAROC of 25% is an automatic yes and a RAROC of 5% is an automatic no,” says EA Markets’s Daniels. “It’s only an initial hurdle.”
Take the Lead
Relying too much on a lead bank can create conflicts of interest and leave a CFO uninformed about alternate credit products and pricing, say experts. “If the guy giving you advice is also sitting on the other side of the table as an investor, there will be a series of conflicts about the participants in the bank facility and the aggressiveness of the pricing,” says Daniels. And the lead bank may not always be thinking about the best outcome for the company in areas like covenants.
To create what Orchant calls “competitive tension” and greater leverage with a lead bank, a CFO should identify alternate sources of capital and even go so far as to obtain serious counteroffers. EA Markets aided Checkpoint Systems, a developer of retail packaging and labeling products, in refinancing a $125 million revolver whose terms were relatively unfavorable. The lead bank offered Checkpoint refinancing terms that were conservative compared with what was available in the debt markets. So Checkpoint and EA Markets began speaking to an agent bank in the facility. The talks helped Checkpoint’s management speak far more articulately about prospective terms and pricing with the lead bank, which came back to the table with a better deal. The refinancing was completed without disrupting the makeup of the facility’s bank group. “They helped us understand where we could influence our banks to improve pricing and terms. In the past, our banks would say, ‘Here’s our plan for restructuring the deal,’” says Checkpoint CFO Ray Andrews.
Lead banks often don’t put much energy into renewing credit facilities, because they don’t generally view lending as a profitable business, notes Daniels. “If the CFO tells the lead bank, ‘I talked to the [other] banks in my facility and I think the clearing price is significantly better; here’s what I think it is and here are the comparable transactions that support it,’ the lead bank will realize its position is at risk,” he says.
Does a bank partnership begin and end with the bank’s relationship manager? That can be trouble. Companies that achieve the best outcomes with their banks conduct them at the highest levels, “closest to the decision-making points,” says Orchant. If the most-senior-level executives from the company are assigned to key banking relationships, then the bank will be more likely to reciprocate.
CFO Box goes out to lunch with the credit decision-makers at his relationship bank often, “so we’re not just another file on the table,” he says. Upper-management ties are also cultivated. The credit committee is like any other political organization, he says. “When they see that the bank president or a senior officer is clearly in favor of a particular issue or company, the whole dynamic changes,” says Box.