Once the 2020 results have been evaluated, many lenders are asking weaker performing borrowers to refinance. This discussion may quickly become heated, with both parties finding difficulty working together.
Most borrowers initially believe they will be able to quickly find a refinance option on their own, and they underestimate the amount of time and effort needed throughout the detailed process of closing the refinance.
Incumbent lenders often feel the need to give the company some time to work through the process on their own. When the company is unsuccessful everyone becomes more frustrated.
What can a lender do to encourage the refinance?
There are several tools incumbent lenders can use to help create more opportunities for a successful refinance.
The incumbent lender’s terms may have been established when the loan was originated or have slowly evolved over time. If the borrower is not performing well, or not performing to plan, the borrower may need to pay a higher rate of interest to a new lender. Desensitizing the borrower to the higher interest rate can be accomplished by the incumbent lender increasing the rate to the default rate (if there is a default), or tying certain performance misses to rate increases. The performance misses could be related to operating performance of the borrower, or to the refinance process.
Additional fees could be assessed for renewals, for forbearance agreements with short time horizons, or for missing timelines for reporting or for the refinance. For example, the incumbent lender may increase the amount of the forbearance fee with each additional 60 day forbearance period required. The incumbent lender may assess fees for missed financial reporting requirements or for refinance process timeline misses.
The incumbent lender may also require additional reporting to desensitize a borrower who is not familiar with a strict ABL structure to an ABL approach. For example, the borrowing base reporting frequency could be moved from monthly borrowing base certificates to weekly or to every time funds are borrowed. Another example would be to require quarterly or semiannual field exams when historically annual exams were required. Or, semiannual appraisals when less frequent ones were previously ordered.
Another tool is the addition of reserves or ineligibles in an ABL structure. For example, reserving for slow moving inventory with a more than six month supply on hand would decrease availability with the incumbent lender and provide a new lender with an opportunity to provide relief while still maintaining a reserve for inventory with more than a twelve month supply on hand. Similarly, lower advance rates could provide the new lender with an ability to provide advance rate relief while still providing a safe advance rate.
These tools desensitize a borrower to a more restrictive structure AND they may allow a new lender to close with excess availability, which is often required by the new lender.
Why are borrowers unsuccessful securing their own refinance?
The key reasons borrowers are unsuccessful in finding their own refinance is emotion, unrealistic expectations, organization of data, and ability to communicate with lenders and counsel to push through to the closing. Borrowers believe their excuses for performance problems, and they expect new lenders to believe the story. Borrowers do not understand the amount of information a lender requires to garner the approval of credit decision makers. It becomes difficult to gather the information and provide it to the potential new lender on a timely basis. Borrowers become frustrated with the amount of paperwork required to make the lender switch.
Borrowers often find one potential lender and focus solely on that single lender. If that lender falls through or provides unacceptable terms, the borrower has no alternatives.
Borrowers may not cast a large enough net to garner term sheets from nontraditional lenders. And, they may contact one relationship manager or business development officer at one location and that individual may be too busy with other projects to devote attention to a deal that requires some work and has delays.
Additionally, borrowers often struggle with how to compare term sheets and understand closing and go forward costs, which means the borrower does not have the same understanding as the new lender.
The refinance process runs more smoothly if the team assisting the borrower knows how to analyze credits and identify deal structures.
At FMG, our team of professionals has commercial banking and investment banking backgrounds. In addition to our ability to assist companies in evaluating and improving their performance, we are also able to evaluate companies and assess how they might be able to develop a new lending relationship.
Data-driven financial analysis and a defined process are what differentiates Focus Management Group from others.