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    Toronto, ON M5C 2V6

    Telephone: 416.708.8746 (CANADA)
    Telephone: 512.710.6737 (US)
    Email: info@nextedgecf.com

    News & Blog

    News & Blog

    Creditworthiness Is in the Eye of the Beholder

    January 28, 2020

    Creditworthiness Is in the Eye of the Beholder

    In Shakespeare’s Hamlet (Act 1, Scene 3), Polonius offers some frequently repeated advice: “Neither a borrower nor a lender be; For loan oft loses both itself and friend…” Polonius’ logic is that combining debt with personal relationships can cause resentment and, in case of default, cost a lender both his money and his friend.

    In today’s tightening credit market, entrepreneurs and bankers find themselves in agreement less and less often about what constitutes a “bankable company.” Getting inside the head of the entrepreneur may help explain why this individual’s expectations of his “creditworthiness” do not always match his lender’s.

    The following scenario is not uncommon. Management has done everything to prepare its loan application package for the bank. Members of the management team believe approval is just a formality. After all, they are longstanding customers. They had some good and bad years financially, but never have they been in default, missed a payment, or broken covenants. So they are shocked when during a meeting to go over the package, the bank responds, “Loan request denied.”

    How could this happen? What was wrong with the information? Were they missing something? Possibilities to consider include:

    • Is their balance sheet fully leveraged, even though they are making all the payments?
    • Are they tight on availability due to working capital issues?
    • Are they bumping up against coverage ratios even though they are not in default?
    • Is their industry in turmoil?
    • Have major competitors popped up who are eroding their market share?
    • Is new technology available that they do not have and can not afford?
    • Have their expense ratios increased while their gross margins have decreased?

    Real or Imaginary Problems?

    Often a company fails to win loan approval, not because of a legitimate problem in the operations of the business or its management, but because of a perceived flaw that was improperly addressed or worse, potentially misrepresented.

    It has been said that there is a name for people who simply walk into a bank and ask for money – bank robbers. Understanding what lenders expect and how to approach them properly can mean the difference between getting loan approval and having to scrape by without additional money.

    Preparing for and thoroughly understanding the loan approval process is essential in minimizing the variables stacked against a business and to help optimize the potential of bridging the great divide between reality and creditworthiness. Corporate finance advisory firms that specialize in helping to “scrub” loan applications to improve the chances of success are useful not only in turnaround situations but also in growing companies.

    Industrial Plant Completion Financing

    The Situation

    • An investment banker, well known to us, approached with an unusual situation. The banker was in the throes of raising $50mm plus for a sponsor-backed company (the “Sponsor”) that was completing construction of a new plant. They needed $5mm of debt as part of a package to complete the plant, in advance of the larger financing. There would be no revenues from this company until the plant was finished, thus they could not pay current interest.

    The Borrower

    • An Industrial Materials Manufacturer (the “Borrower”) that produces a new industrial technology that will compete with fiberglass cloth and fiberglass cord in the automotive and molded fiberglass markets. A multi-billion private equity fund in the UK funded the initial test operations and further supported the US operations with another financial partner that helped to get this US based startup facility into operation. Blacksail Capital Partners (“Blacksail”) provided additional liquidity to finish the project.
    • Large private equity sponsor had invested over $60mm into this company for the development of new technology in the fiberglass fiber space. This is a revolutionary method to create fiberglass cloth and cord out of a rock, which is stronger and cheaper than conventional methods.
    • The Borrower owned the property and partial plant, which was appraised at over $20mm on forced liquidation value.

    The Blacksail Partnership Outcome

    • Blacksail was able to step in with a $5mm one-year facility, senior secured on all assets, including the intellectual property and pledge of stock from the Sponsor.
    • We built in an extra reserve for the interest, so the loan is current and does not drain capital from the Borrower.
    • Working with an investment banker we know and trust allowed us to move quickly and tell all parties what we needed to make this deal work, so the Borrower could accomplish their goal of finishing the plant with some debt in the package.
    • The Sponsor who had already invested significant capital prior to the Blacksail funding put in more equity at the time of our funding, which allowed equity and debt interests to be aligned.

     

    For more information on Blacksail Capital Partners, please contact us.

     

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