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Introductions

Introductions. Dave Bauer Recovering commercial lender Baker Tilly Virchow Krause, LLP – 13 years M&A Capital markets Business planning Jeff French Assurance services General business consulting. Agenda. Current Banking Environment Potential Impacts to your business

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Introductions

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  1. Introductions • Dave Bauer • Recovering commercial lender • Baker Tilly Virchow Krause, LLP – 13 years • M&A • Capital markets • Business planning Jeff French • Assurance services • General business consulting

  2. Agenda • Current Banking Environment • Potential Impacts to your business • Strategies to consider • Potential Negotiable items • Discussion

  3. Current Environment Current News • The amount of capital a bank holds affects how much money it can invest and lend, and how susceptible it is to collapse. U.S. officials, led by Treasury Secrectary Timothy Geithner, want to erect tough new capital requirements that they contend will boost the long-term viability of the global banking system. Forcing banks to hold more capital would constrain their riskiest impulses, perhaps paring economic growth but also smoothing out the booms and busts, the U.S. argues. • The Federal Reserve, in a move aimed at keeping interest rates low for home buyers through early next year, decided to extend and gradually phase out its purchase of mortgage-backed securities. The Fed’s action signals its belief that the ecomony, while in recovery, remains fragile and that housing, which has been seen some improvement in recent months, has only started to pull out of its slump.

  4. Current Environment Current News • The Federal Open Market Committee voted 10-0 to maintain the target federal-funds rate for interbank lending at a record-low range of zero to 0.25%. “Economic activity has picked up following its severe downturn,” the Fed said in the upbeat policy statement it released at the conclusion of its two-day policy meeting.

  5. Current Environment • We’ve only just begun IRA Bank Stress Index Distribution (FDIC insured bank units) Source: FDIC/IRA Bank Monitor

  6. Current Environment • The dollars are even more scary IRA Bank Stress Index Distributions (Assets of FDIC insured banks, $B) Source: FDIC/IRA Bank Monitor

  7. Current Environment • FDIC losses running at 25% of assets • If 50% of the F’s fail = $500 billion loss • Current FDIC reserves = $10 billion

  8. Current Environment • In case you missed it, the last slide said $500 BILLION • Fed can borrow $100 billion and another $500 billion through 2010 • Perspective: • S&L crisis (20 short years ago) = ?

  9. Current Environment • $15 billion • And we are still paying that 30 year loan back • How do funds get repaid? • Raise the rates charged to banks

  10. Current Environment • Typical leverage – 10 x capital base • What needs to happen to loans and commitments when the capital base is eroded? • Yes a $1 loss in capital = a $10 reduction in loans and commitments • A $568 million loss in capital = $5.7 billion reduction in loans and commitments

  11. Current Environment • Regulators – not your friend or mine • Oh yes and commercial real estate lending • Roll over risk • Securitized products

  12. Potential Impacts to Your Business • Pricing Up • Interest rates – 150 to 350 basis points • Floors • Pricing may vary based on term of loan • Letter of credit fees • Unused fees • Depository fees • Loan amounts down • Lines of credit • Capital expenditure financing

  13. Potential Impacts to Your Business • Credit Tightening • Certain asset classes boycotted • Term of loans • Asset advance ratios • Covenants • Waiver of Loan Covenants • Much tougher to get • Fees may be involved • Timing is slow

  14. Potential Impacts to Your Business • Lack of capital when the rebound comes • Capital expenditures required to take on new business • Working capital requirements to fund growth • Compliance issues with advance ratios

  15. Strategies • Communicate regularly • Get close to your banker • Get close to your banker’s boss • Monitor loan covenants closely • If Loan Covenant Waivers are required • Need solid presentation • Need pro-forma financials and cash flows • Pro-forma covenant calculations • Longer timetable for approval • $$

  16. Strategies • Make a profit • Review your bank’s financial status • Stay up to date with current banking events • Work on a Plan B

  17. Strategies • Plan B • Look for alternative sources of capital • Asset based lending • Factoring • Mezzanine financing • Equity • Asset disposition • Get to know some other bankers • Give yourself time to enact Plan B • Know your collateral • Personal asset protection

  18. Strategies • Asset based lending • Still learning, but more particular • Higher loan spreads • Advance rates have not really changed • 80-85% A/R • 50-60% of inventory • 80-85% of equipment OLV • Appraised values have declined

  19. Potential Negotiable Items • Contracts: Only come into play when bad things happen • WBA Documents: Surprise: Not written in your favor • The bank “deems itself insecure” • “adverse change” • Cure periods • Require written notification of all defaults • Eliminate defaults such as “death of a shareholder or member”, especially if there are numerous owners

  20. Potential Negotiable Items • Trade items the best that you can • i.e. Discuss pricing as it relates to total commitment • Review depository processes, fees and earnings credit rate

  21. Takeaway’s • We remain in unprecedented times • Hope is not a strategy • Over prepare for bank meetings • Explore Plan B • Know your breakeven points, lay out a critical path to survive and know when to make critical decisions

  22. Discussion

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