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Relationship bankers are wolves in sheeps’ clothing

FDs CONSTANTLY FACE WORRIES about the robustness of their banking and corporate finance support. Again, we find ourselves on heightened alert given the latest crisis, the Co-operative Bank, and the ongoing confusion about the likely impact on us from the Basel III banking reform package.

It is unlikely that the Co-op’s problems will directly affect most FDs, but Basel III aims to address the resilience of banks and improve risk management through the Credit Value Adjustment (CVA) and the Liquidity Coverage Ratio (LCR), intending to strengthen the banks’ capital positions. Unfortunately, the effect is likely to be a suppression of loan capacity and will hit the SME sector hardest while many large organisations still hoard cash. However, the banks appear to have outwitted the regulators by achieving a delay to the Basel III implementation timetable until 2019, but I doubt that the loan market will see much benefit from this relief.

The stressed landscape of vanilla bank lending is only one aspect. Market conditions are dominated by restricted loan capacity, unfair interest rate spreads, high fees, risk-averse ratings agencies and some spectacular corporate failures. But there are alternatives and I have used many of them. These include bonds, asset-backed finance, supplier finance, invoice finance, commercial paper, securitisation, export finance, mezzanine, and the shark pool of the debt capital markets.

Many of these can be provided by banks, but I have used a variety of other institutions, and have also structured these loans into syndicates coordinated by a single lead arranger. This approach is not for the faint-hearted, but it does afford access to a larger pool of funding capacity.

Whether running a syndicate or an arrangement with one single bank, we will all be faced with the dreaded relationship manager, posing as a friend and confidant. They are frequently rotated, and replaced by another clone with no client knowledge, demanding the FD’s time in a nugatory and pointless teaching exercise.

In reality, the relationship manager’s two key tasks are to spy on the FD in order to protect the lenders’ interests and to sell as many bank products as possible. I am bombarded with pressure from banks that claim their ‘returns models do not work without ancillary business to supplement the margin on the loan’. Their well-rehearsed expressions of disgruntlement whenever I have awarded business to another bank in the syndicate are predictable. Other (non-bank) lenders, in my experience, display none of this behaviour, preferring to sit back and receive their interest payments without complaint.

And then there is the loan agreement, loaded with fees, confrontational to negotiate, costly to amend, fraught with trip wires, restrictions on the business, covenants, cash sweeps, pre-payment in equal proportion across all syndicate members, and intrusive rights in the event of default.

I have seen a number of businesses lose control to banks during times of covenant stress and default. The banks’ only objective is to obtain full repayment at the expense of all other stakeholders and of the business. The friendly relationship managers disappear, of course, to be replaced by the rottweilers of the workout squad.

Recently, I saw a viable SME pushed into administration by a bank that had also lent to this SME’s hard-pressed suppliers and customers. The bank behaved irrationally, took security and, as a consequence, many stakeholders and employees are likely to lose out unnecessarily.

Nevertheless, most banks are very resourceful but remain underexploited by some FDs. In my demands for access to their research, contacts, introductions, I occasionally ask for endorsement when pitching to new customers and competitive prices for ancillary services. Importantly, I refuse to be made to feel guilty about sharing my business amongst other syndicate banks – but I do let them take me out occasionally. ?

Last month the Secret Finance Director visited Poland on business and also attended the International Conference for Deans and Directors for the Association of MBAs in Warsaw.

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