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December 2017
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Does loan restructuring make sense NOW?

I have had some recent experience with loan restructuring, as well replacing a current lender with a new one. Things have gotten a little better, but by no means to a point where we can say banking relationships are back to normal.

The good news is I came across some folks who help companies put together an underwriting package for the bank to use in their internal deliberations. I guess you could say they are doing the bank’s job for them, but they make sure they understand the business and review it with their customer to make sure it is accurate, and present the credit in the best light possible. When the package is complete, it goes out to banks they believe would have an interest. They then listen to what they have to say and keep at it until they find a bank that will take the process to the next step. If you want to improve your “hit” ratio of dealing with banks that actually want to talk to you, and have a timing issue to deal with, I like the way this is handled. Better yet, the front end fee is reasonable and the success fee can become part of the financing package. I can tell that I put together a good set of financials and cash flow projections for bank presentations and I would consider using this process; it gets me to the right banks along with negotiating help to speed up the closing process.

The firm I am referring to above is not an investment banking firm; they perform this middle-man bank financing service. On the other hand, the activity by investment bankers has picked up. One of the services they are providing beyond buy/sell transactions is finding bank financing or other forms of financing, such as sub-debt or mezzanine financing. In their travels to help find financing for transactions they come across sources who have an interest in the industry or at least understand the industry. They can lead you to these sources by assisting in the preparation of a financial package to present to the bank or my merely introducing you to various banks they believe would have an interest. They charge fees for both services, with the introduction fee being the lesser of the two.

Now don’t get me wrong, it is not a bed of roses out there. Dealers who should get loans still will not unless, of course, they don’t need the money. In other words, unless you have a strong balance sheet (spelled collateral) to support the loan, it is going to be tough. Don’t expect many cash flow lenders to welcome your dealer business with open arms because they will not.

The asset based lenders are the bankers back in the loan business. From what they tell me, they think if you made it so far, you may be a bankable risk for the future. Being asset based lenders, they are looking for collateral to back up the loan in addition to sufficient cash to pay down the loan. Before you start talking to these type of lenders, it would be best to do your homework and provide realistic (meaning provable) values for your used equipment, parts and rental assets. In addition, your AR aging with adequate reserves should be part of the package. Expect to provide historical financials and cash flows and projections of same for the next 12 months. Know what you are doing when producing these schedules, because it all has to tie together to make sense. One thing bankers are good at is ferreting out “baloney” when they see it.

The bankers I talked to recently want to keep it simple and they want to do a deal that works for you to avoid restructuring in the future. Part of keeping the deal simple means to not have too many banks involved, which for them equates to issues regarding who gets what collateral. Most of you probably have vendor supplied financing for floor planning and rental assets. If that is the case, it can be tough to find a bank willing to support your working capital needs because most of your collateral is tied up with the vendor programs. For example, even the receivables present unwanted complications because the AR related to rental units belongs to the source of the rental fleet financing. When you get down to it, there is not a lot of free collateral left for the banker to consider. The fact the dealer probably signed a personal guarantee with the vendor makes a dealer loan even less attractive. There have been cases, however, where arrangements have been made to free up your current assets to allow the dealer to provide sufficient collateral to support a new banking relationship. With used equipment prices coming back the way they have been, if your orderly liquidation values exceed the related loan balance, there may be some room to free up collateral for a working capital line or an increased working capital line to provide additional cash when needed.

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