Rebuilding Credibility The Ultimate Asset
The company had never used an outside financial advisor to assist with its banking activities. This time, the challenge of the task was such that the company's executives realized they needed outside help. We have all been in these situations, and the article that follows focuses on the skills necessary to help such a client rebuild credibility and achieve a successful outcome.
Overcoming History and Producing a Success Story
To arrive at a successful outcome, following a set of guiding principles is in order.
Gain access to insight and information. During a one-on-one interview with the company's management team, discuss their prior refinancings, current operations and industry prospects. In addition, begin developing key points that would support the rationale for the company's improved business prospects.
These discussions should make it clear that one must get into the details and build a fact base from the bottom up; therefore err on the side of too much detail and data rather than too little.
Ask for access to all levels of the organization—from the CEO and his direct reports to the analysts in the treasury and controllership functions. Work hard to develop a rapport in a non-threatening way with employees at all levels. Taking the time to do this should yield a steady flow of high-quality information from all of the participants in the process.
Maintain a cash culture. Companies generally evaluate their financial performance in terms of net income and earnings. If they are a public company, it is earnings per share. On the other hand, banks think in terms of cash. Surprises on cash needs can be as damaging to banking relationships as surprises on earnings to the market.
Often, clients generally do not have a "cash culture." They do not track their performance on the basis of cash returns, and they do not have the reporting systems in place to forecast ongoing cash requirements other than at the most macro level. Advise your clients that the bank-lending group will ask detailed questions regarding the current cash position and the forecast cash requirements. The better prepared the client is to respond to these questions, the more credibility the client will have with the bank group.
Typically, one professional is dedicated to working with the client to develop a bottom-up, rolling-cash forecast. The rolling-cash forecast is a detailed map of the company's operations—from the perspective of cash. Seek to create full transparency on major upcoming disbursements and inflows. In this article's example, the client had a very cash-oriented treasury group. They used very extensive cash-management tools that were adequate for the due-diligence process. Rather than reinventing the wheel, use what is available.
Win management's confidence and set expectations. Be aware that the due-diligence process and bank negotiations may be stressful. In the example, the company had a history of over-promising and under-delivering. Since the company had not worked with an advisor previously, you must naturally anticipate some skepticism about your role. Therefore, the challenge is to develop senior management's confidence and set expectations.
During one-on-one interviews with the management team, gather background information and begin building the rationale for the company's improved prospects later in its planning horizon. Use the opportunity to describe how you have helped other clients in similar circumstances.
Also, begin setting management's expectations as to the process, results and timing. Share some previous experiences with other clients to show that you know the lending process and have delivered meaningful results. Go out of your way to emphasize that your role is to support the clients' efforts to achieve covenant relief. Slowly but surely, you will earn management's confidence in your ability to help navigate them through the process.
Recommend the achievable. Borrowers and lenders do not always begin with an appreciation for each other's specific requirements. Borrowers often start the lending process thinking they can provide minimal financial information that may not show an achievable outcome. Lenders, on the other hand, start from a standard lending package that may not fit the company's unique requirements.
As mentioned earlier, the company's track record could be described simply: It had not achieved any of its recent financial forecasts. Consequently, the company's credibility with the bank group was at an all-time low. But the initial inclination of the management team was to over-promise again, fearing that it could not achieve the expectations of its "demanding" bank group.
Going back to the reconnaissance interviews with management, use your one-on-one discussions to gather a better understanding of the downside risks to the company's original forecast. Sit down with management to present the alternative of going to the bank group with a lower forecast and a detailed rationale for it. While the number may be lower than the bank had expected, they will appreciate what they perceive to be an achievable plan with only upside potential—something they had not been given in the past.
Buy time for the client. In the example, the lenders asked for current-year financial projections on a quarterly basis and the two outer years on an annual basis. Initially, the lenders wanted the projections in one package and within two weeks of being hired. If you have worked with the key lenders previously, they will be familiar with your advisory services and track record. Put your track record and professional goodwill with the lenders to good use.
It would be wise to convince the bank group to receive the financial projections in two installments—the current year in installment one and the two subsequent years in installment two. If successful, the company has a tough story to tell. The first month of the year may be behind budget, and the remainder of the year might be expected to be very challenging (read that as "below budget"). While results will be expected to improve in the outer years, a credible rationale for this turnaround needs to be developed, especially given the substantial increase in projected borrowing requirements in the first year.
Delaying delivery of the longer-term projections would allow the team sufficient time to prepare solid projections. It would also split the "story," showing the realism of a tough current year and then the improved picture for the future, based on legitimate customer commitments and reasonable assumptions.
Present a plan with confidence. In the example, the company believed they had an achievable turnaround story. Although they had missed several projections in the past, they felt they had positioned themselves to benefit from an improvement in the industry's economics. They were convinced that the trends were beginning to turn in their favor. The bank group, on the other hand, was skeptical. The company's track record of missing projections spoke for itself. The challenge is to work with the company to convince the bank group otherwise.
The company and the lead agent should host a meeting of several members of the bank group to present their story. Attend the meeting to respond to questions focused on your role as hands-on advisors. Following this meeting, work with the client to set up one-on-one meetings with the larger participants in the lending group. Some of these meetings should be management only, while others should involve you. The meetings give the key participants the opportunity to ask the tough questions without the remainder of the bank group being present. The confidence the company's executives display in the business plan will be an important aspect of gaining bank support.
Streamline the administrative challenge. Professionals are part of the lending process. At a minimum, the borrower and the lender retain legal counsel. Other professionals may also be part of the process, including appraisers of inventory, fixed assets and real estate. The lenders can also have financial advisors, including consultants to evaluate the borrower's plan as well as other financial measures, and to develop covenants, assess the quality of earnings and determine the enterprise valuation.
Data requests and questions are part of due diligence. At times, the process can seem endless: a filled data request is followed by a new data request; an answered question is followed by a new question. To minimize the pain, a good approach is to be responsive while selectively negotiating certain requests or formats.
Another technique is to track what has been agreed upon and what is open, particularly as it relates to the language in the loan documents. At the end of each conference call or meeting, a summary of unresolved items should be circulated among the lead bank, the company and advisors. In this way, you can keep track of what items are outstanding and who has primary responsibility for resolving them.
One simplistic way of describing your role is "running interference" to facilitate the dialog between the bank and the client. The ultimate objective is to be responsive and make sure all constituents feel adequately informed.
Build long-term relationships. A bank group approval to extend new money is typically the end of a positive lending/ borrowing process. The lead agent of the bank group puts into place its ongoing monitoring mechanisms; the advisors, who were part of the lending process, disappear; and the company executives, who devoted their time to securing the new money, go back to running the day-to-day business.
You may want to advise the company to take a different tack to completing this positive outcome by recommending that the executives involved in the loan negotiations call the key participants in the bank group to thank them for their support. In this way, the tension that inevitably results from difficult negotiations will be significantly diffused. These calls also set the tone for improved relations with the lead agent and the key participants in the bank group.
Ultimately, any good outcome requires that the company perform well against the plan it presented. But the real success is rebuilding management's credibility with the lending community by meeting the projections.
1 Peter Fitzsimmons is a managing director and co-head of European business, and Greg Presley is a director with AlixPartners. Return to article