The delicate relationship between bank and FD

The best way to avoid being hauled in front of banks, full of excuses? “Don’t assume anything,” says Paul Hinder, former CFO of Cable & Wireless. “We completed a loan once; the money comes in and you go through the covenants and check all the conditions. The auditors came in and right away said there was an issue with the accounts. We’d been deferring salaries when we shouldn’t have and it wasn’t compliant with UK CAPS [Compliance Approach to Professional Services]. We had a breach in the first week and had to go and talk to the bank. It wasn’t even a cash issue.”

Hinder is speaking at the the Entrepreneurial FD conference, held by Real Business’ sister publication Real Deals on November 27th at the London Marriott Hotel Grosvenor Square. He says he walked away with a waiver but it knocked his confidence, forcing him to explain exactly how the problem was going to be fixed. The bank was given everything it needed to iron out the problem internally. “If you read the covenants, understand them, verify them and don’t assume anything, it won’t happen.”

It can’t always be about due diligence. The economy can be cruel and once cashflows dip and debt becomes unsustainable, it’s time for some tough conversations. Jim Weight, managing partner of Weight Partners Capital advises, “to put yourself in the banks’ shoes when reporting and be aware of all covenants, even the softer requisites. Getting off on the right foot is a must.”

“Many bankers have told me that when they arrived at the first meeting, the business came to talk to them about restructuring. The opening salvo was: ‘We haven’t breached our covenants.’ ‘Yes you have, you’ve breached page 37 and under the terms of the document we can legally call the loan.’ That’s not a nice place to start,” he says.

Don’t forget, a bridge burned is almost impossible to rebuild. Sitting around a table and struggling with the sums can do irreparable harm and does nobody any favours. “If an FD turns up and is not only able to answer banks’ questions, but is not on top of the cashflow reporting the banks are looking at, the FD can’t recover from that situation,” says Andrew Speirs, managing director of Canaccord Genuity Hawkpoint. “It has a huge impact not only on how the banks view the FD, but on the whole company.”

Knowing your numbers and what banks want goes a long way, but relationships count for everything. Weight has seen many FDs repeat the mistake of observing their private equity owner’s banking relationship from a distance. “That’s a dangerous situation because if things go wrong, those two guys are mates and you’re out of the loop and don’t have a relationship with anyone. The private equity manager will be quick to jettison you, and the bank will speak to his mate. From day one, you’ve got to make sure you have your own relationship.”

It’s a bum deal but the FD is the de facto the weakest link. A GP’s equity stake is always more valuable than an incumbent financial director, who must answer to lenders on the other side. 

That’s not to say banks can’t be at fault. Richard Grethe, FD of Focus Pharmaceuticals recalls attempting to secure a loan that was all but guaranteed – until it came to crunch time. “Sometimes you don’t get the right information from the bank and it’s very hard to speak to the credit guys directly. You’re never quite sure what the credit guys are being told, if they know how good you are and the fact that you’re on course for growth. You’re often speaking to a yes-man.”

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