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Publications
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Vol. 7, No. 3, March 2009
PREPARE YOUR COMPANY NOW FOR TOUGH BANKING DISCUSSIONS: The credit environment has changed and the era of “easy” corporate banking has come to an end as banks tighten their credit standards.
In the feature article below, “Is Your Company Ready to Face Financial Institutions in a TARP World?” FOCUS Managing Directors G. Stanley Cutter and Michael Zook, Sr. suggest practical steps to take before the sudden onset of credit restructuring issues, including a custom liquidity analysis covering current and projected liquidity needs, banking needs, capital alternatives, and other financing sources.
G. Stanley Cutter has over 30 years experience advising domestic and international clients about the creation of business wealth. Prior to joining FOCUS, he was a Managing Director with MASI Ltd., a Senior Executive at IPA Advisory & Intermediary Services, and CEO of Wheelchair Getaways of Illinois. He also spent 14 years with Citicorp in New York, Hong Kong and Chicago.
Before joining FOCUS, Michael Zook was a Managing Director at MASI Ltd. where he completed divestitures in the printing, software, business services, and distribution industries. He also worked for Capital for Business, an SBIC and wholly owned subsidiary of Commerce Bank in St. Louis, and was a Senior Vice President for The Northern Trust Company.
Please feel free to forward this newsletter to friends, colleagues and networking contacts. (Go towww.focusbankers.com for newsletter archives.)
Operating nationally and internationally, FOCUS is currently working with buy- and sell-side corporate clients, private equity groups, holding companies and late stage venture capital firms in the following areas:
- Advertising & Marketing
- Building Materials
- Business Consulting Services
- Business Process Outsourcing
- Call Center Services
- Distribution
- Education and Human Capital
- Electronics
- Energy
- Engineering
- Financial Services
- Food, Beverage and Restaurant
- Government, Aerospace & Defense
- Healthcare & Life Sciences
- Information Technology
- Manufacturing
- Media
- Parking Operations
- Retail Franchising
- Semiconductor Equipment
- Telemarketing
- Warehouse Distribution
We have executed dozens of transactions in a range of market segments, but the same fundamentals apply across all of them. Our on-going transaction process provides us with up-to-the-minute market knowledge in these sectors that may be of corporate development interest to you.
Inquiries should be addressed via e-mail to info@focusbankers.com, by telephone to 202-470-1973 or by fax to 202-785-9413.FOCUS CLOSES TWO DEALS
Zantech IT Services Has Acquired Newtek International
FOCUS initiated this transaction, assisted in the negotiations, and acted as financial advisor to Newtek International, Inc. Newtek, an IT services firm based in Reston, VA, supplies expertise in the areas of software engineering, IV&V, and program management to federal defense and civilian customers. Zantech IT Services, Inc., based in McLean, VA, is a newly formed information technology services firm that is 8(a) certified.
“Given the new small business regulations that went into effect in 2008, it has limited the options for owners. However, we were pleased to see the amount of interest despite this limitation,” according to Manan Shah, who leads the Government Aerospace and Defense Group (GAD) at FOCUS. Read more...
Acorn Growth Companies and Cherokee Nation Businesses Have Acquired Aerospace Products S.E.
FOCUS initiated this transaction, assisted in the negotiations, and acted as financial advisor to Aerospace Products S.E., Inc. (APSE). APSE, a multigenerational family business, engaged FOCUS to assist in raising capital for growth and to support an ownership transfer across generations. APSE supplies Milspec and other connectors and parts to aerospace companies and MRO organizations supporting U.S. government maintenance requirements.
Acorn, an Oklahoma-based private equity group focused on the aerospace industry, joined forces with Cherokee Nation Businesses, LLC, a wholly owned corporation of the Cherokee Nation, which also has aerospace holdings. According to Acorn CEO Jeff Davis, “John Slater of FOCUS was instrumental in helping the parties work through a number of difficult issues…” Read more...
Is Your Company Ready to Face Financial Institutions in a TARP World?
By G. Stanley Cutter, Managing Director, FOCUS, and Michael Zook, Sr., Managing Director, FOCUS
What is your strategy if your bank calls and invites you to find a new lender? One of our customers recently met with their banker to find that their loan renewal would have substantially different provisions. The Bank requested:
- Higher collateral levels,
- Lower availability,
- An interest rate floor provision,
- Increased fees for changing the agreement.
Another customer was told to raise more equity before the bank would renew the loan!
Risks and Opportunities of Credit Restructuring Issues
Today’s credit environment is characterized by market turbulence, bank consolidation, markets in disarray and increased regulatory scrutiny. Many companies find themselves weathering the storm although business is not as good as they would like. But, even if every interest and principal payment has been made on time and there is no apparent reason for concern, the onset of credit restructuring issues can be sudden.
Companies and managers need to understand the risks and opportunities surrounding the financial markets’ impact on capital availability. While most often the impact is felt through banking relationships, the impact extends to other financing sources and can affect the company’s liquidity.
As the new year begins, your annual financial statements are with your accountant and they will be sent to the bank as usual. You expect no reaction, but perhaps your bank has gone through some changes:
- Have they applied for TARP funds?
- Have they merged or consolidated with another bank?
- Has their credit quality declined?
- Has your banking officer changed?
If any of these are true, you may want to prepare for potential changes in your banking relations.
Credit agreements are legal contracts that have a number of provisions which may affect your business during this turbulence:
- Is your company within stated covenants?
- Are your company’s minimum equity requirements met, or is the value of your collateral still sufficient?
If you do not understand the consequences of not meeting any of these provisions, you may be surprised by your bank’s reaction.
The Era of “Easy” Corporate Banking is Over
Needless to say, the credit environment has changed and it is likely that your bank will ask for substantial changes to the agreement if anything is out of compliance. The era of “easy” corporate banking has come to an end and banks have tightened their credit standards. In addition, the bank may not have full control over the decision as regulators may have caused the bank to re-examine its portfolio and lending practices.
Recent discussions with bankers have revealed several concerns which play in their credit decisions:
- Is the client or prospect strong enough to survive a prolonged downturn?
- Is the company proactively managing the critical factors in its business?
- Is the company’s Balance Sheet reflective of a financially well managed firm?
- Are there multiple ways to repay a loan beyond cash flow from the business?
- Will making a loan be profitable to the bank?
The banker translates these thoughts into a financial analysis, often historical, to seek answers, and to lead discussions with the company. A ratio analysis of the company’s historical income statement and balance sheets will be compared to others in the industry.
This financial analysis will eliminate or greatly reduce any inaccurate perceptions about the company’s performance. It will direct the banker into specific areas for questioning management and will look to formal plans and benchmarks for the company to overcome prior to a loan being made.
If the banker decides to move forward, the covenant, collateral structure, and the loan amount will be driven by the same analysis and designed to prevent the company from going too far astray. Loan pricing also will reflect the economic times and allow the bank a profit, even if prime rates fall to new lows. The banker may use an interest rate floor to protect himself as rates drop.
Proactive Companies Must Move to Understand Their Liquidity Position
This is not good news. Proactive companies move to understand their liquidity position, though liquidity planning is not usually part of the budget process. Budgets predict revenues and related costs to make sure they are in alignment, but liquidity planning centers on the operating cash needs of the company in comparison with its capital plans and budgets. If there is not enough cash, then budgets must be changed. If a faulty assumption is made about a banking relationship, the results may be devastating.
In-Depth Financial Analysis Can Better Position a Firm’s Capital Structure for the Future
A financial review is a proactive, analysis based plan for the company’s liquidity whose foundation is an interactive review of the company’s budgets, plans, operations and sales expectations. In addition to reviewing the company’s liquidity position, it also reviews the financing alternatives available to the company. The in depth analysis can review covenants to insure compliance over the budget period.
The results of the review may suggest that the company prepare for tough banking discussions, or to seek an additional banking relationship. The review also may suggest other financing sources that might bring capital to the company. There are active mezzanine lenders and minority equity investors who might support the company if the plans and opportunities are of sufficient size or materially change the company’s position.
George Norton Joins FOCUS’ Southeast Office as a Senior Advisor
George M. Norton III has joined FOCUS as a Senior Advisor in the Atlanta, GA office, bringing the firm decades of experience in all phases of business combinations. His approach has been published by John Wiley and Sons, Inc. in the book, Valuation: Maximizing Corporate Value.
“George brings a wealth of experience and tested practices to FOCUS and will have a tremendous impact as a Senior Advisor,” said Jonathan Wilfong, Regional Managing Partner of FOCUS.
About George Norton
Prior to joining FOCUS, Mr. Norton was Managing Partner of his own consulting firm for 20 years, assisting middle-market firms in clarifying their vision, accelerating their growth, and efficiently and profitably transferring ownership. Mr. Norton began his career designing business analysis models for IBM and then earned an MBA in International Finance from The Wharton School. Read more...
Stephen Harlan Joins FOCUS’ Washington, DC Office as a Senior Advisor
Stephen Harlan has joined FOCUS as a Senior Advisor in the Washington, DC office. Mr. Harlan was named 1985 Washingtonian of the Year and, in 1988, the Greater Washington Board of Trade named him “Man of the Year.” In 1997, he was named to the Washington Business Hall of Fame, and in 2002, he received the prestigious Globe and Anchor award from the United States Marine Corps Foundation.
“We are very fortunate that Steve has agreed to join FOCUS as a Senior Advisor. His diverse business experience will be of great benefit to our firm,” said Doug Rodgers, chief executive officer of FOCUS.
About Stephen Harlan
Prior to joining FOCUS, Mr. Harlan was a Partner in Harlan Enterprises LLC, a specialized firm that invests in real estate; Chairman of the real estate firm H.G. Smithy; and, Vice Chairman of KPMG Peat Marwick, responsible for international business. He is a member of the American Institute of Certified Public Accountants. Read more...
FOCUS Web Watch
New FOCUS Government, Aerospace and Defense Group Winter 2009 Report Available
Despite recent turmoil in capital markets, 2009 promises to be active in the government, aerospace and defense (GAD) sector. The premiere issue of the FOCUS Government, Aerospace and Defense Group Winter 2009 Report—highlighting the aerospace segment—is now available. This edition of the quarterly GAD Report includes:
- Selected 2008 FOCUS transactions in the aerospace parts supply industry,
- Recently closed FOCUS GAD transactions,
- 2008 aerospace parts distribution services transactions,
- GAD market trading metrics,
- Overall aerospace and defense Q4 2008 transactions,
- 2009 aerospace/defense outlook.
Click here to download a copy of the FOCUS GAD Winter 2009 Report.
