If we had a dollar for everytime we’ve heard this, particularly over the last 12 months…
“I’ve been with my Bank for [insert big number here] years, I have a really strong relationship with them, my banker has always looked after me.”
Good for you.
Unfortunately, far too many times to count now, we’ve subsequently seen these same people experience one of the following:
- After a few months of promises of forthcoming approvals – even including credit-endorsed terms sheets – the bank then reneging at the 11th hour; or
- Approval being provided, but on terms that either can’t be met in practice, or are excessively restrictive.
Think I’m exaggerating a little? Ok here’s some specific examples we’ve seen in the last few months…
1. Promised Approvals Withdrawn at the 11th Hour
I couldn’t decide which of these 2 stories was more unbelievable to tell, so I’m going to have to tell you both!
Firstly, a Property Developer who was settling their next site acquisition – purchase price about $4 million.
They did the right thing by engaging with both of the major banks that they have existing relationships with, and engaging early – in fact, about 4 months out from settlement.
The Bankers at both banks said they could provide the requested funding without a problem. Both promised it wouldn’t be a problem.
The first bank to pull out did so in a relatively helpful fashion – about 6 weeks out from settlement – so leaving the developers with enough time to sort out an alternative.
Getting a little nervous but not too worried, surety was sought from the other bank – “are you sure you’re going to be able to get this through” – to which the response was naturally “absolutely, we’ve got this, don’t worry”.
Guess what happened.
The more relevant (and scary) question is: Guess WHEN it happened. About 1 week out from settlement. Leaving the developers a matter of days to work out where they were going to find funds to settle a $4m site that they couldn’t delay.
(FYI, STAC wasn’t involved prior to this point, but we’re glad to say that the developer has since made it clear that all negotiations with banks are now to be left to us!)
Second story is on a MUCH bigger scale. A corporate nearing on 9-figures in banking facilities, seeking just a few million extra to acquire another business.
The major bank proudly trotted out their terms sheet, which they made very clear was credit-endorsed, to give the client confidence and therefore to use them as the lender, not one of their other banks.
Believe it or not, again, only about 1 week out from settlement… “Sorry we’re withdrawing our terms”. Seriously.
Now I’ll bet you’re thinking right now “well the bank must have had good reason – did something go wrong with the group?”. Well, let’s just say that after the borrower’s lawyers sent a shot across the bank’s bow, there was a swift 180 and the bank sheepishly settled.
(Again FYI, we weren’t involved with this borrower up to this point!)
2. Approved, but Impractical Terms
This is again a situation we’ve seen multiple times before we got involved with the client, in both the Property and the Business/Corporate space.
Often this is a case of the borrowers and the banks being so focused on just getting a finance approval, that the fine detail (wherein the devil often lies, right?!) gets overlooked.
I’ll do the go-quick on this situation, with 2 very brief examples:
- A corporate trading business with facility limits of about $15m approved by their bank, with a not too lengthy Covenant suite. But badly tested covenants. The bank says “these limits are proof that we’re supporting your growth”… Except for the fact that the covenants restricted the ability for the company to actually draw down on the facilities, even though doing so would have them within the forecast growth path that they had provided to the bank for the approval. In 1 word: USELESS.
- A property development facility for a relatively large project, fully approved & documented. Except, once again, the fine detail in the Conditions Precedent meant that it was effectively impossible for the developer to actually use the facility. Again, USELESS.
(FYI in both instances, STAC was subsequently engaged, with replacement facilities negotiated with other banks that allowed the borrowers to forge ahead on the path they had planned all along.)
HOW TO MANAGE THIS RISK
The short answer to this is that there’s a number of factors that leads to the above risks playing out. Whilst I would love to spell out how to completely de-risk issues like this, unfortunately, some of it comes down to experience in the banking & finance markets, as to what is a high risk of going wrong.
But there are two key matters to be considerate of, respective to the two sections above:
- As much as you want to trust your Banker, at the end of the day, don’t forget that they’re in Sales. They want to give you the money because it will add to their sales results, and salespeople tend to be optimists. Two leading questions: (1) is the deal within credit’s current appetite (sorry but this is a tough one to know if you’re not in the finance game yourself), (2) if it’s not actually credit approved, it’s not yet a deal.
- The Devil is in the Detail. Don’t rest just because a credit approval has been issued – push for the finer detail. In fact, if you want to take a leaf out of our book – push for the fine detail well before you even get to finance approval – it should be part of the initial negotiations, clearly setting out the details that you want and/or need.
If any of this rings any alarm bells for you, get in touch and we’ll be happy to discuss your situation.
– Mark
