[Kevin Henry-Seacoast]

Hey DF,

More an more I am seeing companies that are having issues with their current bank. Most are companies doing north of $50Mil in revenue and have ABL facilities in place that include AR, Inventory, and M&E.
Many of the deals I have seen recently are a direct result of their bank asking them to leave or the owner knows it's coming soon and they are being pro-active.
The challenge with some of these deals is the balance sheet and the way the bank financed the deal. Banks for the last 5 years have been pretty aggressive with cost, flexibility, advance rates, and going after borderline deals all in an effort to win deals as it has been ultra competitive. The problem with being to aggressive on structure is getting a borrowing base out of formula way to quickly by being liberal with advance rates on inventory and M&E. Being aggressive is OK so long as nothing bad happens, but when it does....you are in Hotel California. You can check into the deal, but you can never leave.

All to often the bank reporting requirements are pretty loose. Monthly borrowing base certificates and annual financial reporting. That being said....If something bad happens in May, the bank won't know until later in the year, and they were out of a normal formula in January! OOPS!

Now...imagine if the company stacked a few advances on top of the mess described above. YIKES!

Lessons learned: Stick to your formulas. You don't need to close every deal. Never....never deviate from structure!

[Steven_O]

Maybe I'm ignorant, but why are banks asking them to leave? As always Kevin, you have some great insight.

[Kevin Henry-Seacoast]

Maybe I'm ignorant, but why are banks asking them to leave? As always Kevin, you have some great insight.

Steven,

Risk and the ability for the client to pay back the loan. You can't have many things in the portfolio go wrong if you have been putting money out the door at LIBOR + 2%.

If and when the bank finds out, they quickly go into forbearance. Keep in mind... A lot of banks work out departments are not nearly as large as they were in 2009-2010. If something goes south they don't have the hands to manage the problem and ask the client to leave. Banks have to follow very strict guidelines when they push that button.

The big thing to keep in mind is reporting requirements. With most straight LOCs they are reporting financials annually. If something bad happens in April, it can get a lot worse before the bank finds out. ABL reporting is tighter, built still somewhat loose as most bank only require a monthly borrowing base certificate. Again....if the **** hits the fan the bank does not know they are out of formula for 30 days. In today's fast moving market, 30 days is an eternity.

If some of these deals were structured properly in formula, it makes it much easier for the client to move to another institution. Bad thinks happen to good companies. I don't mind getting into a deal so long as I am adding value and helping the client AND the structure is within a proper formula. Again, the problem with a lot of these deals is aggressive structures.