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“State of the Union” – The Banking & Bonding World of Contractors. Agenda. Introduction Current Banking & Bonding Environment 2011 Preliminary Results Financial / Cashflow Modeling Analysis Regulatory Changes Internal Changes / Controls How to Maximize Your Credit Facilities Q & A.
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“State of the Union” – The Banking & Bonding World of Contractors
Agenda Introduction Current Banking & Bonding Environment 2011 Preliminary Results Financial / Cashflow Modeling Analysis Regulatory Changes Internal Changes / Controls How to Maximize Your Credit Facilities Q & A
Introduction Michael T. Harris II – Banking Fifth Third Bank – Construction & Engineering Division 222 S. Riverside Plaza, 32nd Floor, Chicago, IL 60606 Phone: (312) 704-4268 Email: michaelt.harris@53.com James L. Sulkowski – Bonding DS&P Insurance Services, Inc. 1530 E. Dundee Road, Palatine, IL 60074 Phone: (847) 934-6100 Email: jsulkowski@dspins.com
2011 - The glass was half empty • Reuters – “Contractors may be bidding themselves out of business for highway and infrastructure projects as they low ball their proposals in hopes of winning much needed work.” • Crain’s (12/15/11) – “The Chicago area construction industry is on track to post its sixth straight year of falling sales. Local construction volume is less than a third of what it was during the boom.” • Wall Street Journal (1/20/12) – “Illinois gets a credit downgrade, in contrast to Wisconsin. $6.8 billion in unpaid bills.” • Business Insurance (1/31/12) – “Pension Benefit Guaranty Corp.’s $26 billion deficit could increase by $8.6 billion due to American Airlines.”
2012 - The glass is half full • “Mayor Emanuel and Governor Quinn Announce $1 Billion to Rebuild CTA’s Busiest Train Line and will create 2,700 jobs.” • “Illinois State Toll Highway Authority announced a $609 million construction program for 2012.” • “ComEd Smart Grid construction program will create 1,000 jobs.” • “Manufacturing sectors strengthens and additional capital improvements are anticipated.”
Banking & Bonding Today Relationship driven, however, due to change in credit environment more checks and balances are required in the decision making process More focus on Financial & Cashflow Modeling What is your Business Plan?
Construction Lending: What Has Changed Community Bank Portfolio Challenges Trillionaire Bank Appetite Change The Devil Is In the Details Quarterly Portfolio Reviews Internal Process for New Transactions Our Portfolio Results
Middle Market Lending Environment Federal Regulatory Update What (and what not to) to expect in an “election year” Individual consumer, employee and business owner impact Marching orders for mortgages
Cashflow Modeling Analysis • Where is my money going? • What levels of bank capacity will I need to complete the project? • Is this the right job for my company?
Financial Modeling Analysis CA / CL > 1.5X Working Capital / Backlog > 10% Net Worth / Backlog > 15% A/R Turnover < 45 days Underbillings to Working Capital < 15% Net Worth to Overhead > 3X Total Liabilities to Net Worth < 2.5X Debt Service Coverage > 1.25X
The Most Important Covenant: Whether you have it or not Debt Service Coverage Ratio: Positive Debt Service Coverage Ratio: Negative Net Income: $500,000 Tax Expense: $175,000 Interest Expense: $50,000 Depreciation Expense: $450,000 EBITDA: $1,175,000 Less: Distributions: $250,000 Less: Unfun Cap Ex: $150,000 Cash Flow Avail: $775,000 Principal & Interest: $620,000 Debt Service Coverage: 1.25 Net Income: ($350,000) Tax Expense: N/A Interest Expense: $105,000 (drawn RLOC) Depreciation Expense: $445,000 EBITDA: $200,000 Less: Distributions: N/A Less: Unfun Cap Ex: $100,000 Cash Flow Avail: $100,000 Principal & Interest: $105,000 Debt Service Coverage: .95
Financial Modeling Analysis Profitability Gross Margin %’s Net Operating Income Tangible Net Worth & Working Capital vs Backlog Total Debt / Tangible Net Worth(Leverage) Underbillings as a % of Net Worth Debt Service Coverage EBITDA – Cash flow Available for Debt Service Overhead as a percentage Backlog Profit Risk Rating with your Bank
CNA Credit Model“Benchmarking” • Client report card • Your company results, compared to local/regional peers • Understand strengths & weaknesses – numbers do not lie! • Surety internal control guidance system • Importance of ratios on underwriting decisions – nearing aggregate • Another underwriting tool – management, history, communication, etc. • Best in class!
Red Flags Consecutive years of Negative Cash Flow Inability to produce timely internal financials Delayed Communication Funding Losses Lack of detailed business plan
Rojas Concrete Tree & Land Delgado Steel Bell Land Impr. Carlo Steel Neptune Const. Castle Const. My Baps Const. International Piping R. A. Bright Nu Line Electric Thomas Madden Contractor Downsizing / Closings
Maximizing Credit Facilities • Communication – avoid surprises • Formalize contingency plans – in writing • Be pro-active, not reactive, in all internal/external functions • Professional, prompt financial information – understand it! • Keep overhead low & external investments to a minimum • Increase/extend bank lines of credit, if available • Joint meetings with banker/CPA/surety – discuss business plans, financial results and projections, credit needs – know where you stand