Nothing can be more frustrating for corporate management than to be presented with growth opportunities the company cannot capitalize upon. Whether the opportunity comes in the form of generating new revenues or the possibility to make a strategic acquisition, not having adequate internal working capital or the ability to obtain external financing can create difficulties.
More companies are facing this dilemma than ever before. In a market that has seen historic swings in the economy, forward-thinking management teams have adjusted their focus on material issues they can and cannot control related to securing capital. That includes evaluating commercial lending, which is governed by the whims of Wall Street and Main Street banks, as well as seeking alternative financing sources--an area in which a company can guide its own fate.
For companies that are looking for financing, challenges remain. But in many cases, they're not as insurmountable as they were a year ago.
The good news is that corporate America is significantly better off than it was 12 to 18 months ago. The bad news is the recovery for U.S. companies has been mixed at best, and the pace of improvement has recently slowed in certain sectors.
According to U.S. Economics Update, U.S. business investment has had a brisk upturn, yet productivity slowed more than expected, so firms are finding it harder to fund growth internally. As a result, external financing will be required for many companies. This will undoubtedly put more pressure on a bank lending environment that has been criticized by its corporate customer base for lack of willingness to loosen credit.
The irony of the current bank lending dynamic is that while the politicos in Washington have been touting that their policies have created plenty of available capital for banks to lend, U.S. government bank regulators have placed significant scrutiny on the quality of the loans in bank portfolios. To compensate for this, banks have been making loans only to those borrowers that are considered a "grade A" credit and have pursued those customers aggressively. A client with anything marginally less than a pristine investment grade credit rating can dampen the overall credit quality of the bank's entire loan portfolio.
Bank regulators have stiffened their rating system; a drop in loan portfolio scoring has a significant impact on how much credit is extended to a financial institution. In addition, a lower rating can result in higher funding costs and Federal Deposit Insurance Corp. (FDIC) insurance premiums, and make it harder to raise needed capital. These changes have been frustrating for many borrowers-and for many commercial lenders as well.
That view is echoed by Stephen Wilson, chairman of the American Bankers Association and chairman and CEO of LCNB National Bank in Lebanon, Ohio. In a recent American Banker article, he stated that "regulators have stifled lending to a great degree because bankers are afraid to make loans."
Wilson acknowledged that examiners are understandably cautious since the economy is lackluster and there are many financially challenged banks. But in his view, examiners have crossed the line and have become too cautious. "That over cautiousness is really slowing down our ability to make loans. If we want to get this economy moving, we've got to let the banks do what banks do best, which is underwrite credit," he said.
While the actions taken by U.S. bank regulators to manipulate the lending environment are, for the most part, outside corporate America's control, the search for financing isn't hopeless.
Borrowers should continue to work with their current lending institutions to obtain the necessary senior bank financing. However, business owners also should be more open-minded about approaching other financing sources such as subordinated debt and, yes, even equity, more than ever before. Companies that have capital or access to capital are in a very strong position to make strategic moves compared with their less-capitalized competitors.
In the end, that strategic advantage can be quite significant. Companies that lack the proper capitalization in today's market may be setting the stage for a long-term decline in shareholder value, as better-capitalized competitors gain efficiencies through new equipment, an acquisition or investment in new technologies.
Charles Chandler is a partner in Amherst Partners, which specializes in mergers and acquisitions, corporate restructuring and financing, and management advisory services. He can be reached at (248) 633-2140 or firstname.lastname@example.org.
Reprinted from the March 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.