Key takeaways
- A relationship with a relationship manager (RM) is an asset that can walk out of the door. What you should build is data and reporting discipline that anyone taking over can read and understand.
- A quarterly banker update pack should put historical figures, forecasts and covenant headroom in one document.
- In the example, the current DSCR of 1.33x passes the threshold, but the forecast for next quarter is 1.19x, so the company should talk to the bank today.
The RM who has looked after the company for years is reassigned. The new RM opens the file and asks every question that has already been answered. A facility that should have been renewed quietly starts to attract requests for additional documents. The owner then discovers that the bank had been relying on the individual rather than on the company's data. The same problem arises when you call the banker and nobody replies promptly. It is usually not because the company has no money, but because the figures sent are not clear enough for the RM to defend them in the credit committee.
From closeness to credibility
The RM is not the final approver. The RM's job is to write a case that the credit department and the committee will believe. A company that provides information quickly, completely and consistently with what it has said before makes this job easier. A strong relationship is therefore measured on three points.
- Consistency Send information on schedule, even in quarters when results are poor.
- Accuracy of what you say How far do earlier forecasts differ from actual results, and can you explain the difference?
- Advance notice The bank hears about problems from the company, not from a missed instalment.
What a banker update pack should contain
| Section | Content | Question answered |
|---|---|---|
| One-page summary | Performance, key events, what is needed from the bank | What has changed now? |
| Performance vs plan | Revenue, EBITDA, cash flow, causes of variances | Does the company have its numbers under control? |
| Forecast | 13-week cash flow and the next 4 quarters | Will there be money to repay the debt? |
| Covenant | Current value, headroom against the threshold and forecast value | When will a covenant be breached? |
| Debt schedule | Facilities, amounts drawn, tenor and collateral across all banks | Where are all the obligations? |
| Project | Progress, cost vs budget, sales and transfers | Is the primary source of repayment still intact? |
Example: reading headroom before the bank asks
Hypothetical example The agreement requires a DSCR of not less than 1.25x. Figures in THB million.
| Item | This quarter | Forecast for next quarter |
|---|---|---|
| CFADS | 96.0 | 88.0 |
| Debt Service | 72.0 | 74.0 |
| DSCR | 1.33x | 1.19x |
| Minimum CFADS to pass the threshold | 90.0 | 92.5 |
| CFADS cushion (shortfall) | 6.0 | (4.5) |
This quarter, CFADS could fall by a further THB 6.0 m, or 6.25%, before a breach, but next quarter it is forecast to be THB 4.5 m short. The company has time to prepare an explanation and request a waiver before the test date. If it waits until the compliance certificate is due, its options will be far fewer.
One bank or several
A single main bank
Less paperwork, faster decisions, and the bank sees the whole picture. But bargaining power is limited, and if the bank changes its policy towards the industry, the company feels the effect immediately.
Several banks
You have options and can compare terms. But you must manage collateral, covenants and several sets of reports, and check for negative pledge and cross-default provisions between agreements.
An approach that works for many companies is to have one main bank that holds the operating account, and at least one secondary bank that genuinely knows the company. There is no need to wait until cash runs out before building that relationship. The secondary bank can start with a small facility, such as a letter of guarantee or a revolving facility.
Asking banks to compare terms is useful when the same information goes to every one. In the hypothetical example, an interest rate difference of 0.25% on THB 300 m of debt equals THB 0.75 m a year. This must be weighed against the fees and the workload of moving the facility, and nothing guarantees that the bank will reduce its rate.
Where the owner should stand in this relationship
The owner should not be the coordinator of documents, but should not disappear altogether either. The bank still needs to see the commitment of the major shareholder. The right role is to meet the bank's senior management once or twice a year and to take part when important decisions are made. The CFO or the person responsible for finance is the regular point of contact, and there should be a backup, so that the company's side of the relationship is not tied to a single person either.
When a new relationship manager arrives
A change of RM is an opportunity to start the relationship afresh. Ask for a meeting within the first month. Bring a company file covering the company's history, group structure, current facilities, past performance and next year's plan. Explain past events that the previous RM knew about but which are not in the documents, such as the reason for an earlier waiver request. If the RM is left to learn from the credit file alone, he or she will see only what was written for approval purposes, not the business context.
Next steps
- Prepare a table of facilities and maturity dates for every bank
- Design an update pack of no more than 6 pages and set the submission schedule
- Track covenant headroom, both current and forecast
- Record forecast accuracy against actual results over time
- Prepare a company file that a new RM can read through in one sitting
- Check negative pledge and cross-default provisions before opening a new facility
- Define which matters the owner must attend in person