Don’t Be Undersold, Especially to Your Bankers

“Are you telling me that you can give me an extension for only a month or two?” My client Jim was getting frustrated in his phone conversation with Doug, the senior bank loan officer.

“When we decided to go with you guys to help fund our acquisition less than a year ago, it was with the understanding that we’d have running room to ramp the business up. None of us anticipated that it would be all positive, and of course it hasn’t been,” he reminded the banker.

Doug, the banker, was coming a little late to the game last week. Unlike our two previous update sessions, in February and May, he hadn’t been able to join in the meeting that we had initiated last week with the bank’s calling officer. As a result, he hadn’t had the benefit of a tour of the plant, a demonstration of the new products, a detailed review of the year to date, and a full discussion of plans for the rest of the year and into 2015.

What he did have was our cumulative financial results, which had fallen short of our projections. He also had a summary by the calling officer, plus the record of the company’s steady pay-down of the long-term debt coupled with internal reports to indicate that we’d had only limited need for the line of credit. Finally, he had the report of “the underwriter.”

Ah, the underwriter. He might as well be known as the undertaker. He sits in his cubby in the deep recesses of the bank, cranking out numbers on his abacus, calculating his ratios, and giving thumbs-up or thumbs-down signals to the commercial lenders. At least that was the image I conjured up when the word came back to us that he apparently had decided our financial performance was coming up short.

“Underwriter” is the current term of art for a position that used to be called credit analyst. I know something about that job: years ago, I spent three months before B. school scraping off four years of Navy rust by doing credit analysis for Boston’s leading bank. And before that, my dad had spent the bulk of his career as a senior bank credit analyst.

We both (I’m the first to admit that it wasn’t coincidence) worked for the First National Bank of Boston, New England’s largest bank for most of the twentieth century. The Bank’s loan officers – AVPs, VPs, SVPs all – would come off the road with their customers’ financial statements and Dad would go to work with his pencil and his spreadsheets – on 13-column journal paper, long before Excel, or even VisiCalc.

What emerged from his analysis was a credit rating, one which was a significant factor in the Loan Committee’s determination to extend credit to the region’s major businesses. Dad’s professional world was one of financial ratios, revenue and expense trends, profitability, economic cycles, and predictability. Standard measures, well-established – then, as now – in the financial industry.

But as useful as quantitative analysis has always been for financially-oriented people, my dad knew that a significant part of the loan-decision equation had to be qualitative. Even as he assessed the Bank’s Fortune-1000 customers, digesting the verbiage in their quarterly and annual reports, their press releases, and their personnel changes, he relied significantly on extensive write-ups by the calling officers to support his recommendations.

No one has time for that any more. Unless they’re sitting with you at your table – undistracted by cell phones – and having both their eyes and ears engaged (even if their brains occasionally are wandering), they’re not going to get your full message. Loan officers no longer dictate 1,000-word memos for employees in the typing pool to transcribe as a record of their company visit or phone call. Even if they did, who would read it?

My client’s company this year has had a number of qualitative wins to offset the quantitative losses. At least that’s what we tried to represent to the bankers. The “story line” is a good one. Jim tells it well, and the bank’s calling officer heard it well, or so it seemed by his questions and comments. But he’s the bank’s salesperson. His role is to be positive, to share our optimism, to facilitate our progress with their funding.

He was appreciative of our requesting the meeting in order to fill him in, and he especially mentioned our candor in discussing the risks as well as the opportunities in the business. Several times he emphasized that he’s on our side in advocating for an extension of the Company’s line of credit with the bank. “But,” he said in wrapping up our meeting, “here’s what the credit people are going to want to know.” And it’s all about the numbers.

It was a warning shot across our bow. We were on notice. It turned out that the calling officer doesn’t call the shots. In the next few days, we scrambled to provide color to the picture that the underwriter and Doug, the senior loan officer, had received. The company’s controller and I responded in full to the underwriter’s questions about the financial statements – past, present, and future – in an extended phone call. We even included some of the commentary that Jim, my client, had used to expand on his power point presentation, strongly indicating that the recent profit trend was sustainable.

But phone calls proved to be a poor substitute for a direct sell. In the final analysis, the word got back to Doug that there was too much risk for a full twelve-month renewal of the loan. The bank wanted a shorter leash. So we ended up with a compromise – the line is extended until April 30, when the next decision can be informed by the full fiscal year’s audited results plus a detailed projection for 2015.

We could have done better. As with earlier meetings, we should have visited the bank’s key decision-makers at their table if they couldn’t make time for a field visit at ours. Bankers know that the numbers don’t tell the whole story, but it’s the borrower’s responsibility to make sure that the full story gets told – and sold – to everyone.