LOAN FUNDING’S HISTORY IS NOT REPEATING. IT’S NOT RHYMING, EITHER. IF YOU’RE A CFO, IT’S ABOUT TO START RAPPING
It’s that time of year.?Frost in the air; chestnuts roasting over an open fire.?Jolly ol’ St. Nick is on the way – and (for a lot of CFOs) he’s bringing a big dirty lump of coal for Christmas.??
?
Why am I screwing up your holiday with all of this unseasonal negativity??If you’re a CFO, negativity is something you may be seeing already, so it’s not a total surprise.?But there are some boring global propellerhead things which are about to show up in your inbox which mean the good times are only starting:
·??????We’ve just seen an inversion of the 3 mo. – 10 yr. rates, which is a pretty good signal that a recession’s on its way sometime soon at a bank near you...
·??????Too many businesses are seeing big growth in inventories over 90 days.??At the end of this year, auditors will force a lot of us to start writing this stuff off – which will lower borrowing bases and degrade covenants.?
·??????We’ve now got Jay Powell talking a long-term cost of funds at 1%+ over the long term inflation rate – which changes EVERYTHING. ?
Bummer, dudes.?These are signatures of a shift to a debt world that we haven’t seen in the past three decades.?
Being of a certain age, I’m having flashbacks.?A number of years ago I had a fairly large construction company client which was booking profits by the truckload – and then we had an economic downturn that some of you may recall.?I got a call from the BIQ (Banker in Question) to inform me that profits aren’t enough.??That was the beginning a several years’ worth of fiscal follies and cliffhanger re-engineering.??
Things like that used to happen.??In the past decade we haven’t seen ‘em because there was a never-ending sea of no-cost Eurodollars and it was easier for everyone if you and the bank just let it ride and hoped that there’d be enough PPP payments so everyone involved could muddle through.??????
Forget that.??All off the table.??And some of us financial types will have to dust off the old workout playbooks of a previous generation. ?What’s that gonna mean???
If you’re the wrong industry, you’re about to get a sudden trip to special assets even if you’re doing fine.??We old finance dudes remember that.??Suddenly your old commercial banking pals are suggesting that you might want to look for a loan alternative.?And they’re giving you some motivation by raising the interest rates, cutting back your borrowing limits, and arranging for ballbusting administrative reviews every 90 days. ??
Brave New world, folks.?You can plan on your friendly local banker getting a lot less friendly in the New Year.?This means that the time to start thinking about how you’ll deal with inflation-terrified loan officers is, ah, right now.??
What should you be looking at now that the falcons no longer hear the falconer and we’re headed for the weirdness at multi-Mach velocity??A number of my clients are deep in preparation for all the bad karma that’s in the pipeline – and some of their good ideas may be useful to you. ????????
SOME GOOD CLIENT IDEAS
·??????Create a debt plan right now.??This isn’t a great time to show off your improv skills.????If your revolver or A/R line’s coming up for renewal within the next 18 months, you may be looking at costs doubling even as your borrowing limits drop.
·??????Create a bank pitch deck right now. ?It’s definitely time to structure your thoughts about capital structure, and building your pitch to banks is a great way to do it. ??That’s always a positive – controlling your cost of capital as generally a good thing – and you should do it before time runs out.
·??????Look at where you get your return on capital.??No one loves cost accounting.?But you’ll be amazed how much you’ll love activity-based costing when you see what it can do for you.?Hard core cost analysis is a lot more pleasant than hard core scrambling to replace your bank lines.?Think about it.
·??????Prioritize.???You can’t do it all.??So you need to decide what you’re going to do with finite resources and even-more-finite funding resources.?????????????????
Sounds basic???It is.?The key here is that it’s basic stuff you should work on right now.?A little prep work in between the eggnog and caroling will save you from singing the bank loan blues once we get into 2023.