Banks and other Lenders.

29 April, 2010

Hi,

 

In my last GLOBAL UPDATE – “How to get Funding in a Credit Crunch” – I talked about the availability of finance since the credit crunch hit and how I could help you obtain it.  Well the following’s a bit of a catch up on that so to see the original click here

 

It’s now becoming very clear there’s a big distinction between the lending policies of the banks and other lenders.

 

Banks

 

In the last newsletter I said “the banks were toughening their credit criteria, have fewer funds available to lend and are favouring existing clients. At the same time they are reviewing those existing facilities to seek additional guarantees, covenants, cross collateralisation of securities, GSA security, reduced loan ratios and generally tighter conditions.

 

This policy is continuing and the next phase seems to be a further toughening where facilities are not being renewed, others are being called or reduced, and if you’re unable to pay they’re asking for principle reductions on a P&I basis. This results in further pressure on your cash flows.

 

A solution I’ve been quite successful in implementing has been to refinance the banks out of loans on property with non-bank lenders who are happy with interest only payments. And it’s not just for property owners. Most businesses with bank facilities are using property as collateral security and I’ve been able, for example, to refinance term loans secured against those properties and replace overdraft facilities in other ways.

 

The refinancing may not repay all the bank loans but at least you are seen to be making a reduction. A key part of this process is to negotiate with the bank to ensure their remaining loans are adequately secured. It’s helpful in these circumstances to have someone handle the negotiations on your behalf – something I’m happy to do.

 

It seems no longer are banks taking the attitude that if the business doesn’t work out as expected they are satisfied they are adequately secured over property. I don’t know, but my guess is the last thing the banks’ need is having another non-performing loan in their property loan portfolio. Now more than ever before you must show financial accounts and projections, your business plan, and prove your debt servicing and repayment abilities. You don’t really want to go back to credit several times. That’s not an ideal situation for the bank or the client. 

 

 

So the secret is to spend the time on the proposal and anticipate the questions the banks credit department will ask. This comes from experience and those bank representatives who are relatively new to the business – and have only known the era of cheap money and easy credit we’ve just been through – are possibly giving borrowers a more optimistic view of the chances of approval than the proposal deserves. 

 

As I said the newsletter referred to above. “It’s quite simple really, in an environment where money is tight, the more you do to pre-empt the credit department’s questions – yes that includes knowing what their criteria are – the less work and time everyone has to spend on the assessment and the more likely the loan will be approved.”

 

Other lenders



While the media concentrates on the horror stories surrounding new revelations with the deceased like Hanover, Strategic and others, there are lenders out there who have not stopped lending or who have come back into the market.

 

Privately funded property finance companies. Not subject to a withdrawal on funds like those raising first debenture money from the public, many of these financiers have had time to clean up and are back lending again. They will look at lending more on commercial loans than banks are currently considering but debt servicing ability is being closely examined. A good prospect to refinance banks.

 

Small property finance companies and private lenders.  Unlike the banks, these are still taking an “asset lend” approach where the loan is short term with a clear exit strategy. Here debt servicing ability is less of a requirement than the certainty of repayment from (usually) a sale. The amount loaned in relation to valuation is less than previously allowed as the uncertainty as to property prices remains. They will often look at capitalised interest while the exit strategy is being set up. Expensive but often a better solution than a mortgagee sale.

 

Trustee and nominee lenders. Typically interest only two year loans. Debt servicing ability important. Lend on residential and commercial property. Often more expensive than banks but in many cases not much. I gave details of the terms of a typical example in the newsletter mentioned above. A good prospect to refinance banks.

 

Plant and equipment financiers. Many of these are a survivor of the mayhem the finance industry has experienced in the last few years. Some are subsidiaries of finance companies that have ceased lending on property. Often provides part of the solution to refinancing banks. Have access to a number of these who are keen to do business.

 

Factoring financiers. Factoring is where a business sells its accounts receivable (invoices) to a third party at a discount in exchange for immediate money with which to finance continued business. This was discussed in the previous newsletter. Again I’ve used this as part of the solution to refinancing the banks.

 

Private equity investors. Not really financiers but there is definitely more interest in providing this sort of funding. As I said in the previous newsletter “Most are looking for something they can be fully hands on and add value to – especially in the property sector. Others are happy to take more of a back seat – say for a business investment a position on the board. There are no set rules. I’ve got people interested only in large ventures, only in property, or only in businesses.” I’ve now collected a number of these opportunities so if you’re interested in looking at how you can participate – or you believe this could solve your funding requirements – give me a call. This could be another solution to your bank requiring a loan reduction.

 

Commercial property offshore

 

One final thought. The loose residential lending principles which eventually led to the demise of the Investment Banks and the trillions of dollars the governments had to pour into the global economies, are well recorded. (If you’re interested in that read the following article here or read Michael Lewis’s latest book, “The Big Short” – book review here.) 

 

But there’s still a worry by offshore lenders to their exposure to commercial property. For example to see the Bloomberg article about the latest four banks to go under in the U.S. – bringing the number to 41 this year alone – click here

 

Australia and New Zealand have survived the global credit crunch/recession relatively well. Our banks are strong – see article here  But the question remains – will the commercial property problems offshore hit us here in new Zealand and if so are we going to see a further retrenchment by the banks? Is it time to look at alternative forms of finance?

 

Have a great Easter. 

 

Cheers

 

JP

 

 

 

John Paine
Global Pacific Corporation Limited
112 Gladstone Road, Parnell,
P O Box 3229, Auckland, New Zealand
Phone 64 9 303 3700, Fax 64 9 303 3031
Mobile 64 21 902 004
Email john.paine@globalpacific.co.nz
Web site www.globalpacific.co.nz

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