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I am attending a meeting with a large regional conglomerate with a bit too much short-term debt. "We're looking for proposals from banks for our refinancing," says Kevin, the treasurer of Heavenly Tritones Corp.
"We'd very much like you to be part of the bank group," he continues. "The relationship between your bank and Heavenly Tritones is very important to us. We'd like to see you as part of this financing in order to build on that relationship."
I have been hearing this sort of thing a lot lately, but I still cannot get used to it. Six months ago, companies like Heavenly Tritones would not have dreamed of asking a bank to lend them money. The way these conversations used to go is:
Bank: "We'd really like to be part of your refinancing."
Client: "Whatever."
Bank: "The relationship between our bank and Heavenly Tritones is very important to us. We'd like to be part of this financing in order to build on that relationship."
Client: "Oh yeah, well, we've got loads of relationships with loads of banks and they all offer us debt at virtually a zero spread with no upfront fees and no guarantee of any other business. So you'd have to come in sub-Libor [London interbank offered rate] with a huge underwriting and you'd need to take me out for a pricey lunch once a week for the next six months before we'd even consider talking to you. Actually you've taken up too much of my time already."
So things have changed. Opportunities to lend money are everywhere. But credit and risk officers are also everywhere and getting more powerful with every lurch of the financial system towards collapse. So you can imagine how difficult it is to convince any credit committee that we should lend money to anyone.
A conversation with our credit committee nowadays can be summarised as follows:
Front office: "We would like approval to lend $100 million to Heavenly Tritones."
Credit: "Do they need the money?"
Front office: "Yes."
Credit: "If they need money they are too risky. Approval declined."
Front office: "Sorry, I meant no, they don't need the money."
Credit: "Then it won't damage the relationship if we don't lend to them. We'll save the capital for other needs. Approval declined."
This, of course, means that I am regularly placed in the position of telling clients that we cannot lend to them. They tend not to take this news very well.
When I call Kevin, the Heavenly Tritones treasurer, to give him the bad news that we won't be participating in his deal, he asks why not. Now, this is a tricky question. I certainly cannot tell him the truth: "We're afraid of our own shadows. Every time we turn around another bank has been nationalised or collapsed. We just want to sit quietly by ourselves and wait for this all to go away."
I could tell him what he wants to hear: "Our balance sheet is so heavily stuffed with toxic assets that until our government bails us out, we're not taking our eyes off what little cash we have left. In fact, I'm a little concerned about whether I'm going to be getting another paycheque at the end of the month."
While this response would not help him in his fund-raising, it would certainly make him feel better about us not participating. Like a lot of people, I am sure he has trouble not smiling whenever he hears that a bunch of bankers may be about to lose their jobs.
But I obviously cannot tell him that. Even if it were true, it is not going to do me much good to start a rumour like that about my own employer. Instead, I try to salvage the situation: "I don't want to promise you something that I'm not sure I can deliver. So I want to be completely upfront with you and tell you that you should be focusing on other banks."
"I don't understand, Alan," he responds. "You've been chasing us for business for at least a year now. I will be very disappointed if we do not receive a proposal from you."
This is a very popular phrase among corporate treasurers. It sounds like something my mother used to say. But in the banking world it means I'll never give you any more business and I'll bad-mouth you to all my corporate treasurer friends.
"I'm sorry Kevin," I say, "there's really nothing I can do. But if you can't find enough banks to complete your refinancing, please let me know. Perhaps I can point you in the direction of some more aggressive lenders.
"Of course I'll be able to find enough banks," he says angrily. "Thanks for nothing, Alan."
Three weeks later Heavenly Tritones announces it has been unable to complete its refinancing and is declaring bankruptcy. I would like to say that perhaps if it had been more helpful to us in the good times, then we would have been more helpful in the bad times. But that is not true. I still would not have been able to get credit approval.
At long last, beggars become the choosers
Monday, October 20, 2008
