Q. "The banks claim they’re supporting SMEs but how do I make sure they will refinance my loan no matter what?"
A. During the next two years, around £140bn of corporate debt will mature and will need to be refinanced. If Europe is taken into account, the figure is £1,500bn. Some of this will be pushed into the equity markets as companies are encouraged to raise new capital specifically to reduce borrowing. But a substantial sum will remain, and no one knows whether the banks will have the balance sheet capacity to refinance this without some easing of capital ratios or creating the "room" by reducing lending to other sectors.
The banks have already reduced their mortgage and personal lending to enable their damaged balance sheets to carry corporate debt without breaking the rules about capital adequacy. If they require more capacity they will probably further reduce their lending to SMEs. It’s easier to pass the problem onto this sector rather than large corporates because it attracts less media interest: many of these businesses will simply struggle on, and lenders know the sector will eventually recover through the formation of new businesses.
Every time there is a recession, each of the banks specifies a borrowing level below which they will not deploy the resources to sort out the problem. If you borrow less than this threshold, have good assets pledged to the bank but can’t afford to service the loan at the higher rate that is being demanded, the bank is likely to ask you to repay or significantly reduce the amount you borrow. It may even call an event of default in order to gain repayment from the sale of your assets.
Here’s what you should do:
• Assume that your bank would ideally like to reduce their exposure and increase the margin. Read your loan agreement carefully and ensure that you understand exactly what the bank can and can’t do. Take advice if you aren’t clear.
• Where possible, avoid going to your bank with problems. The moment you admit that you have a problem, the bank regards you as a risk not as a customer.
• Do no more than the agreement specifies. You will only come onto their radar if;a) The balance of the facility you use declines and a substantial proportion remains under used.b) You fail to make interest payments on time.c) You are using close to the maximum of the facility.d) You want to sell a major asset, which is an important part of the bank’s security package.e) You want to borrow more, or vary the terms, or the fixed term is approaching expiry.f) You have specific times when you have to send the bank information about the business performance and value of their security. They may use this to claim that, in the current conditions, there may have been material deterioration in the value of their collateral and that as a result they regard your loan as riskier than it was and can continue at the current level only if you agree to new terms at an increased margin. If you are presented with this argument, which you can’t easily refute, then you may want to ask; • Whether reduced borrowing preserving the loan to value (LTV) will enable the same margins to be maintained. • Whether additional collateral that maintains LTV will enable the level of lending and the margins to be maintained. • If you agree to new conditions while the LTV is depressed ask for documented confirmation that both the lending level and margin will revert to the initial level when conditions improve. • Can you insure their marginal risk at a cheaper price than their margin increase.
• Don’t attempt to give your bank confidence by stating that you only need a fraction of the facilities. This allows your bank to release capital by capping your facility at a lower level that takes away some of your safety net.
• Try to gain stability by asking your bank about fixing the facility for three years at an agreed margin.
• Make sure the bank is supporting your borrowing with all the government guarantees that are available. The capital of banks limits the amount of lending that they can take onto their balance sheet. Government guarantees reduce the risk associated with this but do not increase the gross amount. Therefore for a bank to cancel your loan means that they manage their capital and capacity to support the lending that they cannot liquidate.
Anthony Holmes is an international corporate turnaround specialist and transitional leadership expert. He has led the revival of seven companies over 15 years, and his 30-year international business career spans strategic consultancy, investment banking and senior corporate management in a diverse range of industries. Holmes is also penning two business books: A Time to Lead, A Time to Manage; and Managing Through Turbulent Times.