Successfully Navigating Credit Market Requires Relationships, Credibility and Experience

By Jeff Glasse, Managing Director, Debt Capital Markets, Oberon Securities

Even solid companies with uscasummer long-established lender relationships are now occasionally facing uncertainty regarding their future financing and finding themselves in need of outside support. Whether due to a weakened credit profile, tightening credit parameters at existing lenders, or other factors, successfully navigating this new environment can be crucial to a company’s future.

There are several keys to success but facing the situation early and being proactive and strategic, is essential.

Consider this example: a large tech manufacturing company swung from positive to negative EBITDA during the COVID pandemic. As a result, the company was put on notice by its lenders that credit facilities maturing later in the year would not be renewed, and their loans were transferred to the banks’ workout groups. This publicly traded companys auditors wanted affirmation that the debt could be refinanced in order to produce a clean audit. Clearly, this company was at a critical juncture.

In this case, the company pursued a dual path of rebuilding credibility and managing relationships with its existing lenders while also seeking alternative sources of financing. Although the company had recently installed new top-tier management with strong knowledge of the markets, they also engaged an external debt advisory group with the specialized market knowledge needed to secure an optimal outcome.

After analyzing the companys assets and financials to assess its financing alternatives, the advisory team developed a go-to-market strategy, prepared financing information materials, and led outreach to an extensive array of potential new lenders. Utilizing weekly status reports, the company was able to regularly update its existing bankers on its financing status and build their comfort with management’s handling of the situation.

As a result, when financing offers from new lenders were received, the company was able to leverage this demonstrated financeabilty to convince its existing banks to change direction and agree to extend the existing credit facility.

One lesson to be taken from this illustration is that lenders greatly value transparency and communication from borrowers—a companys packaging of information can significantly improve lenders’ confidence, leading to better financing outcomes. Having a third-party debt advisor involved who knows what’s expected and how to present information in the most compelling fashion can help companies succeed in challenging situations.

It’s also important to recognize another change in the market.  In the current climate, many banks are tightening their credit parameters, increasing pricing, and proceeding more cautiously. That has presented an opportunity for a growing number of non-bank lenders to provide the financings left by traditional lenders. As interest rates have risen, the relative spread between the cost of financing at traditional banks and specialty lenders has narrowed. There is still a gap, but specialty lenders are now much more competitive.

In contrast to banks, which usually serve a wide array of borrowers with multiple financing solutions, non-bank lenders usually have a more specific niche and their own particular approach to lending in various types of scenarios. As a result, especially in the middle market, navigating the non-bank lender market effectively can be challenging, and engaging experienced professionals with in-depth knowledge of the players and their products can add significant value.

If there is one thread that runs through the entire financing marketplace it’s that credit is available, but the playing field and the players continue to change. Banks are more cautious, non-bank lenders are more of a force, and borrowers should consider all of their options. Opportunities may look different than they have in the past and may be more challenging to take advantage of. But there are definitely opportunities to be had if companies utilize best practices and a professional approach.