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From the CFO’s point of view, a company might be a reasonable credit risk because it’s profitable, has positive free cash flow, and is growing sales; a banker, however, has a different perspective.
Every financial institution has customers it likes and doesn’t like based on the financial institution’s growth strategies, profitability targets, market share goals and opportunity costs.
Economic and credit conditions come into play, too. U.S. commercial banks, once in a feeding frenzy for business loans, have had a reduced appetite. A higher cost of funds, higher operating expenses and lower deposit balances have kept their loan book growth moderate. While the Federal Reserve’s reduction of the Fed funds rate may spark business lending, it will take time.
On the liability side, however, banks want commercial deposits, a reversal from the pre-COVID, ultra-low interest-rate era when financial institutions shunned cash.
Those factors—in addition to, obviously, the company’s credit risk profile—determine whether a bank will do business with you, says Bridget Meyer, senior director of Redbridge Debt & Treasury. And that matters “because you never know when the next banking crisis will happen,” she says.
No company is going to check every single box for a financial institution. However, a company can improve its appeal to its relationship banks through attentiveness and flexibility.
At the New York Cash Exchange Conference (held by the Treasury Management Association of NY), Meyer and Brad Costantino, senior manager of global treasury at Under Armour, outlined the ways CFOs can keep their bankers happy, get better pricing and in general turn their companies into customers banks want to keep. They offered several pieces of advice:
Offer deposits
Under Armour generally uses the low-risk approach of keeping excess cash in money markets with daily liquidity. Over the last two years, however, it’s worked with its bankers to understand their capital needs and be more flexible, sometimes depositing cash that will be “sticky” for one, two or three months. That aids the banks and can drive up the interest rates they offer the company, says Costantino
Take small bites of credit
Maintaining a company’s credit risk profile with a bank is paramount—be cognizant of your bank’s internal credit ratings in addition to rating agency grades. “Once a downgrade happens, you’re on the shortlist—that drastically changes the conversation with the banks,” Meyer says. If a banker finds the company a harder sell to risk decision-makers, the borrower should consider a loan of a shorter tenor if possible, says Costantino, and borrower a longer tenor down the road. In addition, negotiate the pricing with the awareness that the price should be just as attractive to the bank as to the borrower. “Everybody’s got to give a little,” he says.
Don’t seek the cheapest funds
As a corollary to the above, don’t just borrow from the credit provider with the cheapest offer, Meyer says, but consider the overall value. “You want [a credit facility] that won’t restrict you from doing business,” she says. “The worst thing that can happen is the company misses an opportunity because [its facility] borderline wasn’t flexible enough.” Consider negotiating with the provider on collateral or other lending business for more flexibility in a basic loan product offer.
Be a reputable customer
“I think the number one factor is [customer] reputation,” says Meyer. “Banks are starting to pay more attention to social media profiles. What is your company posting online? What is your leadership posting?” Banks are watching, says Meyer. “Banking is a small community, so be mindful of how your reputation can impact your banking relationships.”
Apportion ancillary businesses
Which bank in the company’s syndicated line of credit is getting the borrower’s deposits? Whose cash management products is the borrower using? “We like to sit down at least once a year and look at all of our relationship banks in a spreadsheet and figure out who’s getting what business—bank fees, receivables, cash management, FX, capital markets,” Costantino says. “Bankers are always telling us something different than what we’re showing in our spreadsheets.” But the spreadsheet gives Under Armour a baseline for starting the conversations, he says. “I’m always letting my treasurer know what can be pitched.”
Make the relationship profitable
Just as RedBridge advises corporates on banks, banks have consultants that advise them on their customer bases, showing them “all the companies and customer relationships that are not profitable,” she says. CFOs should know the risk-adjusted return on capital (RAROC) a bank earns in the relationship. The more side business a company gives a bank, the more likely the relationship will improve the bank’s internal profitability metrics. Industry also matters. When a bank looks at its overall risk, it may decide it’s overexposed in a particular sector or would prefer to lend to a different business in the same sector. “You must know how you fit into their overall mix,” Meyer says.
Monitor ESG pledges
Many banks have pledged long-term to align their lending businesses with better-governed borrowers, especially regarding climate change. Some of the banks’ initiatives have targets five to 25 years out, so changes to their loan books won’t be immediate. However, CFOs should be aware of banks that plan to allocate capital to reward greener credits or companies and penalize others. “If you’re in electric power, auto manufacturing, iron, steel, aviation—all those industries might be considered a little bit dirtier, if you will, a little bit browner, and some banks may be reducing their loan capacity in those industries,” she says. “If you’re in one of these industries that is not attractive, aligning your goals on ESG with the bank’s may help to tell a better story.”
Stay in touch
Long-term banking partners should get continued attention—it might make the difference between a bank participating in your next financing round or passing on it. Continue to tell the company story, recommends Costantino. Share information such as forecasts, growth rates and strategic initiatives for the next three to five years. “Continue to spend time with your banks and pay attention to the details in credit agreements,” he advises.
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