In addition, interest may be tax deductible and may benefit from lower withholding tax rates as compared to dividends. Assuming the transaction is able to support debt service obligations and financing terms are not too operationally onerous, bank financing can multiply the investor’s returns generated while at the same time preserving capital. On the flip side bankers are generally selective on the transactions they want to finance, and it may only take a few issues before bankers turn transactions away, which may throw a spanner in the works.
Here are 6 tips and tricks we have gathered from our experience raising bank financing for transactions in the commodities space.
Prepare well before initial contact with banks
First impressions count, and even more so in the world of bank financing. Having succinct, highly readable and user-friendly information at the onset would allow bankers the opportunity to provide quick feedback on the bank-ability of your project. On the contrary, doing a data dump of information or having no readily available data may reveal a lack of preparation on the borrower’s part, and may leave a negative impression on the part of the borrower for future opportunities presented. In our experience, it would be ideal to prepare the following documents before formally approaching the potential financing banks:
Non-disclosure agreement (NDA)
Summary information memorandum
Proposed bank financing term sheet reviewed by a lawyer experienced in this type of financing
Financial model with proposed debt metrics incorporated, in line with the summary term sheet
Recent audited financial statements
Other key industry-specific reports which have a direct impact on bank-ability
Talk to the Relevant Bankers
It is of utmost importance that you present your opportunity to the correct department which houses the relevant bankers who have an established track record in financing similar transactions. It would also be useful to know beforehand the preferences of the bank in terms of acceptable geographies, sectors and borrower credit rating, and also be mindful of the areas where the bank had suffered losses from fraud, defaults and fines. Talking to the wrong department may lead to a waste of time or worse, receiving inaccurate feedback on the bank-ability of your project. Understanding where final credit decisions are made within the bank globally for your type of project would lead you to the right people.
Give away security sparingly
In most bank financing, securities need to be pledged to the bank as a credit condition. In certain cases, pledges of certain assets and assignment of certain contracts are market standard. However, there is a tendency for banks to ask for all unencumbered securities at the moment, including negative pledges, as conditions to their financing. Pledging all securities to the bank may be acceptable for large ticket financing – however, bear in mind that should you need to raise additional bank financing down the track, new lenders need to execute an inter-creditor with existing lenders which may be a sensitive and time-consuming exercise. As such, in the first instance borrowers should aim to carve out the security package assets that have no bearing over the underlying asset you are borrowing against.
Maintain competitive pressure
It pays to maintain some competitive tension and time pressure between multiple banks on the hunt for your ideal financing package. Negotiating simultaneously with a few potential financiers and analysing the pros and cons of each offering in a systematic way would allow you to determine which offering suits your project needs. While maintaining dialogue with multiple potential financiers may require more resources to your transaction, we have seen competitive pressure reap dividends in the form of lower costs of financing and also quicker process. While some competitive pressure is useful, over-playing this hand by constantly leveraging offers may discourage bank financiers from pursuing the transaction.
Engage a lawyer specialised in the type of financing
For borrowers serious about obtaining a competitive bank financing deal, engaging a reputable lawyer specialised in the type of financing would keep the bank honest in the documentation, as well as help ensure the financing documents do not contain terms that are overly-punitive in nature. The lawyer would also speak the same language as the lender’s counsel, and can save the borrower valuable time by discussing legal matters offline, lawyer-to-lawyer. Many borrowers also use lawyers as their mouthpiece to negotiate better terms and rates with the bank, within reason.