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❤️🧠 Investor Relations III: Winning the banks’ heart & mind

Keeping lenders happy

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Bank on it

7 of them walked in. All new faces to me.

One after another, they introduced themselves as either MD or VP of some part of the bank. Structured solutions. Origination. Leveraged finance. Corporate credit. Trade finance.

All words that meant a lot to them… but not a lot to anyone else in the world.

Business cards were slapped on the desk. That scene from American Psycho was only a minor exaggeration…

The job titles in banks always confused the hell out of me. And I like to know who I’m talking to:

“Nice to meet you all. So who’s in charge here?”

I already knew the answer I’d get…

“Well, we all represent different parts of the bank, so we can tailor a solution to your needs.”

I’d been here before… their wide eyes said it all.

Each had their own P&L to fill, and here we were, fresh meat. The currency guy had an FX trade to sell. The sector lead had a must-do M&A deal. Capital markets insisted we should raise money while the market was hot.

One by one, they each started selling their own transaction.

We were being force-fed a series of thinly veiled sales pitches. All this, despite the fact, that they had received a clear brief on what we were looking for: a new partner to join our lending syndicate.

Fifteen minutes in, I stopped them.

“You guys haven’t asked what problem we are trying to solve? Who in the bank is representing our interests? Who will manage our relationship?”

And just for comic effect… at that moment, two more people walked in holding business cards. They worked in yet another part of the bank I didn’t understand.

Reflecting on the experience, I remembered a conversation with an early mentor; Adam. He’d been a successful CFO in, amongst other things, a bank. He was my go-to guy for advice with banks.

He’d told me that when you walk into a bank you think you are dealing with one institution. But you aren’t. A bank is made up of several parts specializing in different things, some with different cultures. They are awful at talking to one another. And often actively compete with each other.

He told me the key to managing banks is a) knowing which part of the bank you are dealing with at any time, b) having a great relationship director to represent you and your interests inside the bank.

It stuck with me…

Deep Dive

Winning the banks’ heart & mind

This is part 3 of a 3 part series on investor relations.

I’ve been rewatching ‘Game of Thrones’ recently. So expect more references…

I remember at college learning there were two ways for businesses to borrow money: bank lending and issuing bonds. And there was a time this was true.

In ‘Shoe Dog,’ the story of Nike, Phil Knight tells the story of how Nike nearly died many times over in the early 1970s. He had a profitable product, and rapid growth. But his product was imported, and all of his profits (and more) were being reinvested in working capital to fund growth. He tells of the daily battle for cashflow. It came to a head when the Bank of California pulled his only line of credit. With nowhere else to go, he discovered the marvel of Japanese Trading companies, who agreed to fund his supply chain. The rest is history.

Today that same problem would be settled by a simple unsecured loan, letter of credit, or one of the myriad of fintech products which fund supply chains.

As financial markets have innovated and gotten more sophisticated, they have developed new ways to lend money.

Borrowing used to come in just vanilla and chocolate. Now we have the Bank of Ben & Jerry’s - a sundae bar of loans where the options are limitless:

  1. Bonds: Investment Grade Bonds, High Yield Bonds, Convertible Bonds, Zero-Coupon Bonds, Callable Bonds, Putable Bonds, Green Bonds, Sustainability-Linked Bonds, Step-Up Bonds, Subordinated Bonds

  2. Loans: Term Loan A, Term Loan B, Revolving Credit Facility (Revolver), Bridge Loans, Syndicated Loans, Unitranche Loans, Mezzanine Financing, Working Capital Loans, Bullet Loans

  3. Private Credit: Direct Lending, Venture Debt, Distressed Debt, Stressed Debt, Special Situations Financing

  4. Asset-Backed Lending: Asset-Based Loans (ABL), Receivables Financing (Factoring), Invoice Financing, Supply Chain Finance (Reverse Factoring), Securitization (Asset-Backed Securities), Leasing (Capital and Operating Leases), Equipment Financing, Real Estate Loans, Margin Loans

  5. Specialized Corporate Borrowing: Commercial Paper, Debtor-in-Possession (DIP) Financing, Trade Credit, Letter of Credit, Factoring, Project Finance, Islamic Finance, Export Credit, Peer-to-Peer Lending (P2P)

  6. Government-Sponsored Loans: Small Business Administration (SBA) Loans, Export-Import (Ex-Im) Bank Loans, Development Bank Loans

  7. Hybrid Financing: Preferred Stock, Perpetual Bonds, Warrants

And the number of institutions willing to lend has grown too. Be it your friendly local banker, your e-commerce platform provider, or that aggressive loan-to-own hedge fund.

Note, from now on,  I will use the term ‘bank’ as shorthand for any kind of lender.

We’ll run a future series on what these products are and how to use them, for this series we will focus on managing relationships with the banks you have.

After all, the best way to get new borrowing when you need it is to do these two things:

  • Demonstrate that you are creditworthy by running the business well and meeting previous debt repayments successfully

  • Build a strong reputation as a CFO with banks and the key people within them

In short, do a good job with the banks you have…

I remember early in my CFO career, we had a new chair appointed. He had had over 25 years as a top CFO and all the relationships to go with it.

His milkshake (credibility) immediately brought all the boys (banks) to the yard. There was a complete change in how many of the banks engaged with us.

It made me realize I had some work to do personally to command that respect inside banks. I immediately started thinking about a completely different time horizon with them. I wanted relationships that would last decades (with the right people, of course.)

Here are 7 things I wish knew sooner about managing banks:

1) Their problems are your problems

I’m going to contradict myself. All banks and their products are different, yes. But they all want the same thing at heart:

  • Deploy their capital

  • Earn the best return they can

  • Get their money back at the end (either through repayment or by seizing the assets you pledged)

And naturally, the more risk you present, the more return they want.

The type of risk you are, and the type of products you need, will determine the team you need inside the bank.

If you are an investment-grade credit, you will need the friendly corporate lending team. Cheap funds.

But if you are a 6x EBITDA levered sh*tco, the friendly guys will get a nosebleed, and you’ll need the leverage finance team. Specialists in taking more risk.

Each team within the bank will have its own cost of capital. SOFR + an internal margin (set based on your perceived credit risk, and the quality of the security offered).

Think of this like their COGS. They will need to earn a margin on the cost of those funds.

By understanding who your contacts in the bank are, and what types of lending they control, you have taken your first step to making friends with a banker.

Congratulations… I guess.

2) Your ‘wallet’ is your worth (to a bank)

The next question is what do you have for them?

What ‘wallet’ do you have? Banks talk about ‘share of wallet.’ This means, how much money do you have that will end up in the pocket of a bank? And how can they get their hands on the biggest share of it?

The size and shape of your ‘wallet’ will determine which banks are the best fit for you.

Do you have a lot of currency trades? Do you need a new term loan? Is your factoring facility up for renewal? Is there a bit of equipment finance you need?

By knowing where banks can earn money from your business (now and in the future) you can understand your leverage.

It is by dangling carrots like this that you will make new friends.

3) Good relationship directors are worth their weight in gold

I’m laboring the point on the importance of knowing who you are talking to inside a bank. But for good reason. It is 90% of the challenge of working with banks.

I have wasted months getting no progress on a crucial piece of funding, believing I was talking to the right people. Only to see it unlocked in a heartbeat once I did finally get in front of the right person.

Navigating this nonsense is much easier if you have a great relationship director inside the bank. At a certain size, you will be allocated a relationship director whose job it is to understand your problems and go to the right place inside the bank to solve them.

A good one is worth their weight in gold. Bad ones are ineffectual. There are at least as many bad ones as there are good ones.

Ideally, you want someone who knows your sector and knows how to navigate inside the bank. But most importantly, they must be an advocate of your business. If they can’t be excited about your business to your face, it is unlikely they will put their neck on the line for you in crucial internal conversations.

For smaller businesses, a half-decent relationship director will be able to solve most issues and will act as the decision maker (with support from the credit team).

But as you grow and the decisions and products become larger and more specialized, the relationship director is less influential. They become more of a conduit to the decision-makers. More on that in a moment.

4) Credit calls the shots…

Nothing happens in a bank without credit approval. This is a team inside the bank that controls the process for determining the credit scoring of your business.

That score determines their risk appetite for your business i.e. how much they will lend you and on what terms.

There are multiple layers to it, and as a client, you rarely get real transparency into the process. It can be frustrating.

As your business gets bigger, and your requirements grow, you’ll learn that credit calls the shots. Anything you can do to better understand the ‘internal credit view’ of your business is helpful. It only needs one credit analyst with a misplaced view of your industry to blow up a whole piece of lending.

So if you get a chance to meet credit teams directly, accept the offer and take it seriously. Don't talk to them about the wonderful prospects of your business. They don’t care.

Their job is to look at the downside.

They just want to hear you are going to get their money back. And if a, b, or c goes wrong you have a mitigation plan. The probability of default is all they care about.

5) … until you get to the big bosses

But credit teams ultimately work for someone, right?! Yes.

When you get to a certain size, and you are, or have the potential to make serious money for the bank (remember your wallet) you’ll start to attract the attention of the guys that actually own large parts of the bank's balance sheet. These folks head up particular sectors, geographies, or products.

It can be hard to know when you’ve reached them. Everyone in a bank is called a f*cking MD or VP, after all.

They have the ability to ‘take a commercial view’ based on the relationship, prospects, the credit scoring. Ultimately, they set the tone for how your business is received in their part of the bank.

These relationships are golddust to you. One phone call can solve months of back and forth and frustration.

Get this right, and they will end up effectively doing the relationship director role for you, just don’t abuse it or annoy them. The trick is to give more than you get and only ask when you need to.

If you can build personal relationships with these people, that endure beyond any one role, even better.

6) Use strategic transparency

To build trust, you need to be transparent. Especially with bankers. If they think you are withholding something important, or are the sort of person/business that would, they will discount your creditworthiness. Why wouldn’t they? You can hear it now, “we don’t know, what we don’t know.”

Things go wrong in businesses all the time, even good ones. Bankers say they understand this, but, readers, hear me now, they do not understand this.

Bad news has to be communicated very carefully. You are only ever one phone call into the credit team away from having your credit lines pulled. If it can happen to Phil Knight, it can happen to you.

That doesn’t mean you should withhold information, of course. It means you have to be careful.

And you MUST tell good stories. Stories grounded in facts, but good stories nonetheless. Ones that can be well-received internally. It’s a lot easier for a relationship director to convince their credit team that a major customer loss isn’t a big problem, if they are armed with good stories.

The art here is over-communication during the good times. Let’s say I send you a monthly business update each month, call you quarterly for an update, and come and see you every six months. That builds positive background noise. 

Then when I tell you about an issue and how we are going to fix it, it’s just one thing in a sea of otherwise good news.

But if I pick up the phone to tell you about a problem, and we haven’t spoken for 7 months, alarm bells go off.

Put the work in, you never know when you’ll need it.

7) Have a plan if things go bad

Sometimes things don’t work out. It becomes inevitable that not everyone is going to get repaid. Or perhaps the credit market is turning, and that borrowing that came so easily 3 years ago, may not be there for you now.

There are lots of businesses going through this right now.

When a loan defaults or is at risk of defaulting, it will end up with the ‘work-out’ team within a bank. By this point, your normal day-to-day relationship contacts have zero influence. The ‘work-out’ team are like an internal team of corporate debt collectors.

They will either enforce their security once they have the power to do so. Or worse, sell it to a distressed loan investor who will. And you can imagine what those guys are like.

That is, unless you get in ahead of it…

Most banks don’t like enforcing security. It’s expensive, embarrassing and a pain in the a**. So you can negotiate before you get there. This is almost always worth doing, because failure to agree new terms probably means insolvency for your business (and a scar on your back).

If things go bad, you need leverage. Once upon a time, I knew we would breach a debt covenant at the next test date. And I was sure at least one bank wouldn’t support us in amending the covenant.

So we drew every credit line we had overnight. We went from 20% drawn to 100% drawn in one blitz. Even though we didn’t need the cash in that moment (and despite the interest cost). Possession is nine-tenths of the law, and in that case I’d put each bank in a position where agreeing to a covenant amendment was their logical choice.

It did some relationship damage, but it was a matter of survival in that case. (Note - this was a particular set of circumstances, so not a strategy I would generally recommend!)

Have a plan to the downside, you can be sure as hell the banks do.

I hope you enjoyed this series on investor relations. It only scratches the surface of working with shareholders and banks.

We will go so much deeper here with future series on capital structure, building banking groups, negotiating funding, etc.

If you have any specific requests for content in this area, please let me know by hitting reply.

Next week we have a special edition on ERP implementation.

Bottom
Bottom Line SCFO

  1. Banks are complex institutions. You need the correct entry point.

  2. A great relationship director is worth their weight in gold

  3. Use strategic transparency. Over-communicate good news. Communicate bad news carefully and selectively.

Office

Alejandro from Chile asked:

My company is in the process of purchasing a manufacturing plant, and we have received two offers from different banks. One offer is from one of our two primary banks, while the other comes from a bank with which we currently have no business relationship. Although our main bank has slightly better commercial terms, I am considering whether it would be more beneficial to accept the offer from the new bank to diversify our banking relationships, or if it would be wiser to deepen our relationship with our current bank.

Thanks for the interesting question, Alejandro.

Banks are delicate animals with fragile politics. So you are right to think about this carefully.

Long-term relationships are important with banks. So whatever you choose to do, make sure you act transparently and keep friends.

I would suggest prioritizing protecting your existing banking relationships. That doesn’t necessarily mean awarding them the business. But it could mean finding another way to help them or involve them.

There is also a question of how big your banking group should be. 2 is small. Which is fine for many needs. But if you are going to have growing borrowing needs in the future (and if you are acquisitive), you’ll need to have more banks as friends.

So if you can… here’s what I’d do:

Speak to your challenger bank, and tell them you’d love to award them some of the loan, but they need to match the terms of your main bank. Sell them the dream of a partnership and opportunity together. Oh… and tell them they are your favorite bank.

Then speak to your primary bank and tell them how you’d love to take their money, but you’d like to bring another bank into the fold. Ask them whether they’d be happy with a 70:30 or 60:40 syndicate on the debt. Oh… and tell them they are your favorite bank.

If you can get both banks in play at the terms of your lead bank, that sounds like the move here. It does make the legal docs a bit more difficult (and make sure the two banks are ‘pari-passu’ with one-another, i.e. have the same asset claims). This means you’ll need a proper banking lawyer.

Finally, where is your other (non-participating) primary bank in this? Shouldn’t they be taking a share of this debt too? Even if it’s just 10%. And especially because they are your… ahem… favorite bank.

Best of luck with the deal, Alejandro (I have Lady Gaga stuck in my head now).

If you would like to submit a question, please fill out this form.

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The Secret CFO

Disclaimer: I am not your accountant, investment advisor, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. And certainly is not investment advice. Running the finances for a company is serious business, and you should take the proper advice you need.

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