Why borrowers should do their homework
When searching for asset-based financing, it is important for a company’s finance team to understand the value of their assets and their cash flow. This involves understanding the appraised value of their fixed assets, examining their working capital assets, and ultimatelyunderstanding how those values will be viewed by their potential lender. In larger, widely syndicated transactions, another important consideration is the current market depth and capacity for other investors.
The appraisals and field examination are relatively straightforward, and the overall financing proposal process is more streamlined for a lender if that information is readily available and accurate. In some instances, the field examination and appraisals are prepared by third parties, but the lender may also choose to conduct their own valuations. As part of their own assessment of alternatives, companies should reach out to potential lenders for market updates.
Companies should ask about the ABL and high-yield deals that are currently in the market, the current pricing and covenant terms, and the current valuation trends. In this economic environment, asset values have fluctuated dramatically, particularly in industries like specialty chemicals, building products, and manufacturing. By opening a dialogue with potential lenders, companies can better understand the value of their collateral package and what assets would support a facility. Lenders like Wells Fargo Capital Finance are often willing to analyze a company’s balance sheet and review collateral to provide meaningful feedback on the amount, terms, and structure of an asset-based or high-yield financing. Companies should also try to understand the breadth of the options available to them and be willing to consider alternatives. This is especially important in a declining economy. With declining collateral values and less demand, companies are operating with less cash flow to support a refinancing. Unfortunately, this is often the time when companies are most in need of support from their lenders.
Finding the right solution may involve both a balance sheet and operational restructuring. It is apparent when a company has too much debt to support its business plan, but the need for operational assistance might not be easy to identify. Are there areas where the business model can be modified so operations are a little leaner? Should certain businesses be curtailed or discontinued? By looking for synergies between both the operational and financial restructuring, a company may be able to find a way to create additional liquidity.
It’s also worth keeping in mind that some of the obvious short-term fixes can be counterproductive over the longer term. For example, we see a lot of companies reduce capital expenditures when times get tough. This is not always the best strategy, particularly if it substantially diminishes the value of your collateral at the exact time it needs to be maintained. This is where a firm like FTI Consulting can provide experienced industry guidance and management options to reduce overall costs and maintain a viable business plan.
Relationship banks like Wells Fargo want strong communications with their borrowers over a long period of time. It’s easy to have a solid relationship when things are going well. The challenge is to continue to communicate and find mutually beneficial solutions when times are difficult. A key to success is developing strong relationships with your bankers well before a crisis arrives.