Appetite Changes in the Senior Debt Markets (THREAD)

After 8 years, the switch from a Borrowers’ market to a Lenders’ market has happened overnight. Your negotiating power is gone - strap in (1)

As stalled deals re-engage or if you seek an upsize, extension or covenant relief on a current deal, here is your new reality (2)

New Deals: Our strike zone has clearly narrowed - those that were ‘called strikes’ are now balls. We’ve seen a lot more passes, many ‘not yets’ (let’s wait for Q2) and leverage is a half to a full turn below previous levels (3)

Buyouts getting less leverage lead to reduced purchase prices or bigger equity checks, and a movement to smaller cash up front via larger earn outs and seller notes (no surprise here)
(4)

Libor declined from 2.35% last year to 0.20% but banks cost of funds havent declined commensurately squeezing our margin. We’re establishing libor floors (starting at 1.00%) wherever possible and increasing up front / unused fees / libor spreads - ALL when the docs are opened (5)

Clients that were well capitalized before this are fairing much better than those who weren’t. Our focus is always on leverage and capitalization when times are good, and liquidity when times are not (6)

Said differently, “How do you go bankrupt? Two ways...”

“Gradually” (Leverage / Capitalization)

“Then Suddenly” (Liquidity)

Know your cash flow

(7)

13 week cash flow forecasts are huge if you’re struggling. Liquidity is your oxygen and you better understand your O2 levels.

The #1 reason why deals never make it back from workout is CFO quality. Good CFOs are AMAZING when times are tough (8)

So What? What would I do if I were you? Again, the more touch points you have the better. Managers are the decision makers - Uptier above your banker to the mgmt level for pricing/structure negotiation and remember - the squeaky wheel gets the grease (9)

Still stuck? Get another term sheet - we fear a loss of the annuity, especially for a good client. Play the game and be prepared to leave IF the cost is truly that important to you (10)

If you have sizable deposits / treasury fees / ancillary business, you have more say in your loan spread. Don’t forget about your ECR (earnings credit rate) to offset treasury fees (0.20% is halfway decent) (11)

Do a treasury review - what services aren’t needed and ASK for fee reduction! Tell them to price you like a new deal. Our treasury fees increase every year and I’m always surprised I never get pushback, and god forbid I move my libor spread up one basis point on my loan (12)

One other comment not entirely related to this thread - Especially in this environment, the fraudsters are out. Please have the proper guard rails in place. If you don’t know what Positive PayEE means, ask your banker (13)

Most Important Factor: Time. The more time you provide, the better the outcome. A tight timeline is your enemy now more than ever (END THREAD)