A few years ago I wrote a column in Business in Vancouver encouraging corporate borrowers to write their own credit applications (“Assessing the New Do-It-Yourself Approach to Corporate Borrowing”– issue 1407; October 18–24, 2016).
My argument was that rather than leaving it to the banker, borrowers are better off when they bring a draft credit application to the first meeting. It’s more efficient, reduces the chance of errors in a document that’s important to borrowers’ futures and, even though they’re paying for it, they don’t get to see.
That it would make it easier for the company to shop its request to other lenders appealed to borrowers, but that argument didn’t make me very popular with all the bankers I know.
To my surprise, since writing that column, my experience has been that a better transaction for a borrower is often better for the bank too.
It’s a bit like buying a custom-tailored suit. Both tailor and client are better off if the suit fits perfectly. The tailor can do a better job when the client has a realistic body self-image and tells the tailor everything about how and when the suit will be worn.
Better yet if the client understands the language of the tailor’s trade and can discuss the warp and weft of various fabrics the tailor might use. Also, the price for the suit is agreed on up front. It’s not likely to change while the tailor is taking the client’s measurements.
Bankers want to be financial tailors to their clients, but companies are naturally wary about what they tell a banker taking the company’s financial measurements. They know everything they disclose will affect the price and terms of the financing.
Banks have a lot of products and services that could be useful to their clients. For some, the terminology is unfamiliar, and bank customers are always wary of sales pitches.
Without a complete understanding of borrowers’ situations and plans, opportunities to provide them with better-fitting products, or sell them at all, can be missed.
Here’s an example from real life. It has to do with interest rate swaps that banks use to make fixed-rate term loans over a couple of million dollars. Banks fund loans with deposits on which they pay interest, if they pay it at all, at a floating rate. The deposits can also be withdrawn on demand. In a perfect world, from the banks’ perspective, they would have to make floating-rate loans repayable on demand only.
When pressed, they have a workaround to make their floating-rate loan look like a fixed-rate long-term loan, by making it repayable on demand and adding a schedule of reductions to the loan limit over several years.
In a way that makes it look like it’s attached to the loan, the bank offers an interest rate swap that has a principal that amortizes to match the scheduled reductions of the limit.
Although banks aren’t supposed to bundle products, the loan agreement will require that at least 75% of the floating-rate exposure on the loan be fixed, and the only obvious way to do that will be the interest rate swap.
For my client in the real-life example, one interest rate swap that matched the amortization of one interest-bearing liability until it got paid off just wasn’t an effective strategy at the beginning, and it became less useful as time went on, for the borrower and the bank.
The borrower, a company, was more conservative than the bank. It would have converted 100% of its floating-rate exposure into fixed rates – not just for one loan, but for all its debt and as far as possible into the future. What the bank was offering was to fix the rate on one of several loans the company had with a swap that would provide less protection over time while the company’s plans indicated it would need more.
Situations like this are ideal for showcasing what a competent banking adviser working for the borrower can do. With help from a trusted adviser that knew what banks can do and how to get the best from them, the company got much closer to the 100% level of protection, with simple swaps that matched its growth aspirations. The bank got to sell more product to a client with a lower risk profile. •
Guy Heywood is a principal with Corporate Banking Advisory and managing director, treasury and banking advisory services, for Global Treasury Partners Ltd.