How do you balance your lending between cash-flow and asset-based?
We provide financing, leasing and advisory services to our middle-market clients and their customers across more than 30 industries. We understand the dynamics of these sectors, and because of that we’re comfortable taking the risk that our cash-flow loan will be returned to us. We also look at the valuations of the companies and the size of the loans against the enterprise value to ensure that we’re not pushing things too far from a credit perspective. If a lender is doing a health-care deal, and doesn’t understand the sector, and the borrower has reimbursement risk, then the lender is subject to having bad things happen to it. At CIT, we pride ourselves in the industry expertise. We recently closed a wind-power transaction. In order to complete such a deal you need to understand all the elements of what’s going on in power regulation; what’s going on in the specific market for which that wind generator is producing power and what alternate sources of energy are available to compete with the project.
In the public markets, many companies are issuing debt to pay a dividend to equity holders. What do you like to see your borrowers use their loan capital for?
We are comfortable with our borrowers using the loan proceeds for refinancing, for growth, for acquisitions and, to a limited degree, dividends. Obviously it’s a lot more interesting to us as an institution to provide capital for a company to grow their business through the acquisition of a competitor or the building of a plant. However, you can’t ignore financing dividends to equity holders. You can’t take yourself out of the marketplace altogether because at times its an appropriate use of capital. When we look at funding a dividend payment to shareholders, we want to make sure that the owner of the company still has a real interest in the company succeeding.
As a bank, do you provide other business-banking services to your clients?
We offer caps and swaps to our clients so that they could potentially lock in the current low interest rates and protect themselves from the adverse effects of any potential interest-rate jump that might come in the next couple of years.
Think about it — if you’re a middle-market company and you want to buy a swap there’s a small amount of credit risk associated with that swap. Who better to understand your company than your lead lender or a strong lender in the credit? Otherwise, trying to get a third party to provide a swap may be almost impossible.
So with the capital available, how active is middle-market lending?
I think the middle market will probably stay active, but things can change quickly. Regulators are putting a lot of pressure on banks to keep leverage reasonable.