Community Banks May be the Answer
By Peter B. Ventre, CPA, CFA, Managing Partner
Portland, Maine Office, Corporate Finance Associates
It's no secret banks across the country have tightened their lending standards, and in many cases actually reduced the size of their commercial lending portfolios. Over the last eighteen months, many business owners have found their banks unwilling to support them beyond their present lending level, regardless of their strong lending history, current condition, or the length of the relationship. In some cases, businesses in good standing with their bank, but in an out-of-favor industry have been shown the door at renewal time despite meeting all loan covenants and terms. This has been especially prevalent with the largest national lenders, banks and finance companies alike. Many frustrated business owners have simply not been able to access credit for basic working capital or the growth opportunities so desperately needed to reverse the downward economy.
As banks recognize that the economy is slowly recovering, some are beginning to make new commercial loans. While capital for senior debt financing is once again beginning to flow, it does so within a new set of realities: less leverage, more collateral required, stricter covenants and higher pricing spreads. This new environment requires borrowers to find collaborative ways to work with the few active, albeit cautious lenders.
As little as two years ago, business owners had a myriad of options for financing their businesses and their facilities. Banks of all sizes, insurance companies, and Commercial Mortgage Backed Securities lenders were eager to take positions on a variety of businesses and properties. Now with larger than ever non-performing loans and their associated capital impairment, business and commercial property owners could be led to the conclusion that capital is simply not available.
Community Banks may be the answer
Many large national and regional banks are in holding patterns, working through troubled loans that were made during the height of the market and avoiding the possibility of new risks. Community banks have had their share of troubles too with the vast majority of recent bank failures nationally, occurring at community banks. Community banks that have survived in this environment likely have maintained traditionally conservative credit standards and a local market focus. These banks are lending, but with stricter guidelines than in the past and at maximum loan amounts that are down from their historic levels.
Larger loans in the US are frequently participated out among national lenders, sometimes dozens of lenders in a deal. The idea of participation among lenders is not a new concept, but doing this with community banks was not common. With banks in a cautious lending mode, larger loans may still be possible to achieve by combining two or more community banks on the deal. Partnering on loans is not an every day practice for community banks, and the process is different than closing a deal with a single lender.
Here are some keys to success:
Choose your Bank partners thoughtfully: Remember, many community banks compete with each other, so you may not be able to partner two banks working in the same target market. We have had success partnering multiple banks from different geographic areas. Community banks usually keep their lending close to home. A bank based in a rural area with strong deposit gathering dynamics but limited high quality lending opportunities may be willing to partner with an urban-based bank that is closer to more numerous good quality growth opportunities.
It is not customary for the borrower to have a working relationship with all the bank participants. In fact, the convention is the opposite: one lender takes the lead role, as all parties are looking for efficiency in the process. As the borrower, you should expect to meet with each participant early on in the process, but generally not in an ongoing fashion. The real issues with loan participations are in the agreements between banks, known as intercreditor agreements, especially about how they will handle delinquencies, foreclosures and liquidations.
Shaping Multiple Offers into One: When seeking to partner among multiple community banks, there will undoubtedly be some variation in underwriting standards and the proposed loan terms among lenders. A good advisor will help you reach a deal that comprises the best of all proposed terms, recognizing that it may take some compromise from each party to get to a result in which all participants can agree. Additionally, you will need one community bank that will take the lead on your behalf and among the other banks, typically committing to lend more on the transaction than the other participant banks. The lead bank will be critical in coordinating among other participants the approval, closing and servicing of the loan.
Start Early: A participated loan takes more time to close than a similar loan with one lender. It simply takes more work to pitch the deal, negotiate terms and coordinate the closing among participants. Give yourself plenty of time, especially if you're refinancing an existing loan or line of credit that is about to mature.
After the Close: Within any participation arrangement between community banks, one bank will act as the lead bank and servicing agent for the others, so from the borrower's perspective, you will be paying only one bank. The business owner typically will have a depository banking relationship with the lead bank and not with the participants.
If your financing needs are modest, less than $20 million in the aggregate, you most likely can find a solution with some creativity and willingness to work with multiple banks. There are banks with excellent deposit gathering capacity, but few good quality lending opportunities. They are seeking to place good quality loans outside their traditional markets. They seek those loans through lenders they know and trust, and whose loan administration has a good record of success. In the end, a good deal that can close is always preferable to a perfect deal that can't close in this environment. At CFA we assist our clients in accessing capital by promoting to these lenders investment grade loan situations which they can use to grow their portfolios. Ask your local CFA representative how they might help your company grow.
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