FINANCE ISSUES

• Secured Banking and "Effective Control
• The value of Bankruptcy: 0.50% 1.00% 1.50% ?
• Self inflicted credit squeeze

"We had a great relationship with our lenders when we were borrowing funds for expansion and equipment. Nothing was too difficult for them to consider and their rates were always the best! Those same lenders have now appointed the Receivers and I'm facing bankruptcy!"

As a Financier with nearly twenty years experience in this industry, employing senior finance executives within our organisation with up to thirty years experience in asset funding, it is always interesting to look back at the business cycles of the last few decades and marvel at just how often history repeats itself.

The spate of recent collapses in the Printing industry were entirely predictable - as are an even greater number of business failures still to come, together with the restructuring of a couple of major equipment and consumables suppliers likely to take place over the next year or so in response to depressed margins, bad debts and soft market conditions.

We know of a dozen major Print Houses operating newer, major multi-colour plant who are unlikely to see the year out simply because of poor trading and the fact their secured Bankers will move against them before their security positions erode further.

What we have witnessed over the last twelve months is not unique to the Printing industry as we see the same cycles occurring in other areas of our business - all of which are equipment finance related.

With few exceptions, most businesses we have seen pushed into Administration, Receivership or Liquidation, have been so at the direction of secured creditors (predominantly core Bankers), rather than any unsecured lender or trade creditor. This is simply because a secured creditor whose exposure is supported by additional property mortgages and Registered charges over the business and its assets, has less incentive to support an ailing business than its independent equipment financiers and trade creditors whose potential for loss is far greater.

That is, a creditor, uncomfortable with the performance or future outlook of a business who holds fixed charges and mortgage security exceeding their debt exposure, is more likely to determine the future of a business than an equipment financier or trade creditor who have a vested interest in assisting the business to survive through restructuring their payment terms in order to recover their debt.

The Printing industry, like so many others, has in fact become a victim of aggressive lending practices promoted by their Bankers in order to compete against independent equipment financiers (like Graphics Finance) and specialist Lease Brokers.

How many of you have limits for overdraft, core debt, trade debtor finance and equipment finance secured against business assets as well as personal assets through your Bank?

Generally, these facilities are all competitively priced. In addition you probably retain a reasonably good relationship with your Business or Commercial Banking Manager.

Remember, many of those companies who recently fell over maintained equally strong relationships with their lenders when they were borrowing funds! The same lenders who have now appointed the Receivers!

What value do those business shareholders now facing Bankruptcy place on the 0.50% or 1.00% interest rate saving obtained through their secured Banker?

Perhaps your local Relationship Manager has changed. Perhaps their discretionary limits have been "redefined" with credit approval now required from a "credit cell" basing decisions on "industry averages", acceptable "gearing-ratio's" and profit analysis. Perhaps, notwithstanding your long term relationship, the Bank has just experienced a multi-million dollar loss against another Printer and placed the industry on "credit-watch" (Do you know how hard it is to raise funds for technology related borrowers at present - irrespective of their stability - simply because of the IT industry's high risk weighting?)

The problem first arises when you detect a little negativity in your Banks attitude. Cash flow is tighter. Debtor payment terms have risen. GST has impacted liquidity. You start to feel the need to spread your risk by utilising the services of a lender other than your own Bank on your next equipment purchase but it may be too late!

The problem is, your Bank has you "locked-up". In their commendable support of your growth over the years, they have "understandably" taken fixed and floating charges, mortgages over your properties and their finance documentation cross-collateralizes all of the security they hold to support your total debt outstanding. Under their Fixed and Floating Charge, they have more "effective control" of your business than you do because they can sell your assets or appoint external Receivers and Managers without your permission, whereas you need their legal consent in order to trade or sell your assets under their charge.

You approach a new lender to consider funding. Perhaps they are the Equipment Vendor's finance arm (although do you really want them to know your financial position as they negotiate sales with many of your competitors?) or perhaps they are one of the myriads of general finance companies or lease brokers maintaining regular contact.

Unless the lender is dedicated to your industry like Graphics Finance, with staff reflecting decades of industry experience and understanding, they may well consider the transaction too difficult in view of your Banks dominance of your Balance Sheet, a negative market outlook and the loan size relative to the security (or lack thereof). Unfortunately, this decision may be reached after your CRAA has been accessed and this new enquiry registered - particularly if non-industry specialists like Lease Brokers are utilised.
Ever tried negotiating more relaxed security terms with your Bankers when your relationship with them is deteriorating?

Many firms create their own credit squeeze by not reacting and not restructuring until it's too late.

Remember, all of those companies who recently fell over maintained strong relationships with their lenders when they were borrowing funds and certainly didn't foresee their financial demise!

Somewhere along the line, either through Mismanagement, Misguidance or Misfortune, their funding relationship deteriorated.

By this stage, external refinancing is extremely difficult and the outcome, inevitable!

As a Financier with nearly twenty years experience in this industry, employing senior finance executives within our organisation with up to thirty years experience in asset funding, it is always interesting to look back at the business cycles of the last few decades and marvel at just how often companies learn not to fall into the same traps.

Firm's, who spread their risk when tighter economic conditions prevail, invariably survive and prosper.

Just as it is commercial suicide to rely upon a single major customer - no matter how attractive the margins appear to be - it is equally suicidal to rely upon a single funding source - no matter how attractive their interest rates are.

Frankly, when you consider interest rate movements over the last year or so, a couple of percentage points either way is unlikely to have as much impact as maintaining complete flexibility in your funding arrangements.

Restrictions, borrowing covenants, forced asset sales, an inability to grasp market opportunities as they emerge, loss of flexibility - what price a monogamous funding relationship?

It is never too early to:

Ø Consider restructuring your Balance Sheet.

Ø Spread your borrowings across several lenders.

Ø Develop funding relationships before they are needed.

Ø Enjoy a partnership with Graphics Finance