Dealing with Your Banker

Strategy Talks

Podcast Series

Restructuring in a Down Economy

Dean Mullett
Helen Mallovy Hicks
Vince De Luca

Episode 6 - Dealing with Your Banker

Release date: Apr. 9, 2009
Hosts: Dean Mullett and Helen Mallovy Hicks
Guest: Vince De Luca
Running time: 17:32 minutes

This episode talks about how important it is for private companies to keep the lines of communication with their banker open at all times.

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Episode 6 transcript:

Dean: Welcome to Strategy Talks with Dean and Helen, part of the PricewaterhouseCoopers Managing in a Downturn podcast series. I'm Dean Mullett, co-head of our Restructuring and Distress Strategy Group, and a member of our Credit Crisis Task Force.

Helen: And I'm Helen Mallovy Hicks, a Partner in the Advisory Practice of PricewaterhouseCoopers in the Dispute Analysis & Valuations group.

Dean: The current state of the economy is understandably of great concern for most Canadian businesses. This series of audio podcast discussions with a variety of subject matter and industry guests are designed to help your business weather the storm by exploring some of today's hottest issues related to the economic crisis.

Dean: In today's episode, Dealing with Your Banker, we are joined by Vince De Luca, a managing director in our Corporate Finance practice. Vince helps companies refinance and find new sources of capital to run their business. Vince will help shed some light on today's economic downturn, and how it is impacting companies and their search for capital.

Helen: PwC has done a study of private companies and how they deal with their bankers, and I understand Vince, that you have written an article based on the data from this study, and you're going to share some of this information with us here today.

Vince: Yes, I will.

Dean: Vince, to start things off, maybe the first thing I'd like to ask you is, what's the key driver that people really need to get a handle on in dealing with their bankers in this environment?

Vince: Business owners basically need to demonstrate to their bankers that they're proactive and forthcoming with information, that they have winning plans — and that will cause them to potentially advert being squeezed by the credit crunch.

Dean: How do you suggest they go about doing that, in making sure their bank understands they have a viable plan?

Vince: The first thing they should do is staying in touch with their banker. From our study that we've conducted across the country, we've noted that a lot of companies that we have surveyed have not increased the communication with their bankers; they've actually kept things as it was in the past. But in these uncertain times, with this rapid change that's occurring, you need to increase the communication you have with your banker.

Dean: So is that a little bit of the old "no news is good news"? So they kind of put their head in the sand, and hopefully not be noticed?

Vince: Yes, I think that's what it is, but in these uncertain times, even if your business is doing well, you should be communicating that to your banker. Everyone's reading all the bad news in the papers and bankers themselves have no idea if you're performing well, so you may be in an industry that's not be performing well, but your business could be doing well, and they'll have no idea if you're not communicating that to them. They may get it on a quarterly basis, depending on your reporting to them, but you need to call them at least twice a month and just let them know what is occurring with your business.

Helen: Are you finding there are differences between private companies and public companies and how they deal with their banker, or what you recommend they should do?

Vince: Yes, definitely. In terms of main differences with private companies and public companies there is the reporting and the information sharing. Public companies have to report on a quarterly basis — some of them have financial analysts who are having monthly calls with them. There's investment reports that are going out. Whereas private companies, just by their definition are more private, they hold back information. I think they don't view their bankers as partners. They just view them as a stakeholder, and they'll let them know what they need to know when they need to know it. And I think in these times, in order to manage the relationship, you need to be doing that a lot more frequently.

Helen: Right, so private companies maybe need to work harder than they are currently because they don't have those quarterly mechanisms in place.

Vince: Definitely. One of the facts that came out of our questionnaire is that only 39 percent of the poll that we conducted have increased communications with their banker over the last quarter.

Dean: Makes you wonder what the other 60 percent are doing. This economic situation we find ourselves in this time, how's that different than other contractions of the economy that we've seen?

Vince: I would say the main differences between this contraction and other ones, is how rapid the decline is happening. No one would have forecasted that, in the last quarter that they would see their sales decrease between twenty and forty percent, and they really haven't adapted to that. The other main difference is that, albeit, there are a couple of industries, but most of them have been experiencing economic growth for the last fifteen years, so it's really been a mentality of growing your business, and now this rapid decline has happened, and a lot of managers haven't had this experience.

They've been focusing on growing and growing and growing, and a lot of the senior management teams that had had experience in recessions have actually left the corporate scene due to natural attrition. So we have the storm of bad news and economic repercussions happening, we haven't switched our mindset yet to deal with it.

Dean: So are you seeing that a lot of people are perhaps lacking the experience of a contraction, or maybe a little bit of deer in headlights syndrome happening these days?

Vince: Yes, definitely. I think, as I said earlier, a lot of them were focused on growing and growing, building capacity, and that was across almost every industry. And now it's switched from expanding to contracting, and they're just hoping that things are going to get better quicker so they don't have to deal with that.

Helen: So Vince, what is the right communication to your banker?

Vince: I would say that definitely an increase in communication. Prepare a forecast. We, again from our study, we've seen that private companies, a lot of them don't actually even do forecasts. They haven't increased their forecasting, or done revisions in light of this economic time which is quite interesting. As I said earlier, some businesses are seeing 20 to 40 percent drops in revenues and to not prepare a plan to deal with that, and communicate it to all of your stakeholders, not just your banker, I think is not a good way of approaching it.

Helen: And what about with private companies, they often have a human capital issue. They don't have the level of resources that a public company might have to deal with putting together this additional information. Any thoughts or suggestions there, Vince?

Vince: Definitely. I think the easiest thing to do is, if you think you don't have enough horsepower, definitely see your financial advisors and get the help that you need. One of the key success factors in dealing with any issue is having enough time to deal with it, and if you wait until it's too late, as some people do, especially private companies, you're limiting your choices and alternatives. So getting help earlier, rather than later is definitely a key success factor.

Dean: Vince, in the companies that you've worked with through the years, how would you say their abilities or their focus on really understanding their cash flows or day-to-day cash flows, where would they rank in putting that type of material together?

Vince: Oh, we've seen various levels, but I'd say the majority of them don't really spend the required time preparing forecasts and then revising them. You need to look at your input costs; you need to look at your foreign exchange if you're dealing with that.

You also need to deal with your supply base — how are they fairing, and we don't see that. When we go out there, especially companies that are experiencing some kind of financial distress, they really haven't spent the time on forecasting. You would think it would be the opposite, but it's just not something that most people are comfortable with, and they just shy away from it. And in these times, it's even more critical to be spending extra time on forecasting.

Dean: So goes the old story — when someone asks someone, "How did you go bankrupt?" and the answer is, "Very slowly at first, and then very quickly." And it's because they don't see what's coming. Is that basically what you're saying?

Vince: Definitely, definitely.

Dean: And if you were a company that was going to be running into some financial difficulties and it caught you off guard, what should they be doing at that point in time?

Vince: I guess one thing they should be doing is first developing a plan, before even communicate this to all your stakeholders is get the help you need, get your financial advisors to help you, formulate that plan, communicate that plan internally. A lot of it is changing the mindset of your employees in your business. Pick the few key success factors or key performance indicators and really work those ones there to help you out of your situation.

Helen: Vince, you talked about a lot of corporations and executives not really being used to dealing with a downturn, managing in a downturn. We're used to positive results and communicating moving ahead and growth. What do you recommend in terms of talking to your banker, communicating the issues of declining revenues, cost cutting measures? How do you talk about negative issues with your banker?

Vince: I think you've got to be forthcoming and open about it. There's no one right now that isn't aware of what's happening. It's all over the news, it's all over the papers, so you're not going to be telling them something new. What you need to do is communicate how you are going to addressing those issues. One thing you need to communicate right now, and what bankers want to hear is that you've left that economic growth mode, and you're actually into capital preservation mode, where you're looking at how can you manage your costs accordingly and get yourself out of this potential predicament that you may find yourself in, and also be ready for the next uptick when it does happen.

Helen: Be clear that you have a strategy, you've got a plan in place, and financial forecasts to support it, that you're dealing with the issues.

Vince: Correct.

Dean: Assuming you're a company that goes and you're managing your banking relationship proactively. You have a game plan; you show you've got a reserve in cash. How have you found the banks to be as far as flexible in working with their existing customer base?

Vince: If you're open and you do all the things that you just said, they're going to look at you differently. It's all about credibility. And even honesty - if they see that you're doing everything you can and you've communicated that to them, they're going to be a lot more patient with you as well, if it does take a little longer for it to turn around.

Dean: Now, companies are breaking covenants and things of that nature. I guess historically, at least the way I understand it, is that banks would often give waver letters, things of that nature, but I understand that that is no longer the case, and what's the practice that we're seeing out there today?

Vince: Well what we're seeing is that the banks themselves are having their own challenges, so they're spending more time looking at their client base, and not only their client, but their clients' clients. So, if you have an operator, they're going to look at the margining of your clients and see the creditworthiness of them, so they're really looking at their risk and pushing it through your business, but it's not easy to get waver letters anymore.

One of the mistakes we're seeing that some of clients doing is, they want to cut costs and they're looking at their revenues, and their revenues are decreasing twenty, thirty percent, so they're applying that simple math down to their cost structure and saying we need to slash costs 20 to 30 percent, without even having a plan and understanding the costs that they're trying to cut, and say does this actually make sense to try and cut it in this area? Or does it make sense to cut it in this area? One of the other issues or concerns is that you can't keep cutting costs in order to help this issue, because you want to make sure your business isn't hurt in the long run, and it is ready to do well if and when the economy does turn.

Dean: So at some point you start cutting into the bone, and if you cut into the bone, the limbs not there the next time you need to run.

Vince: Exactly.

Helen: And Vince, are you saying companies aren't being terribly strategic about this? They're not looking at the overall big picture and if that's the case, how can we help?

Vince: I think most of them are in a panic mode, and they're just trying to do whatever they can. If they call us and we go to the table, we're going to bring more of a structure to it, and basically get them to sit down and say what really matters, where can we cut, how can we address some of these concerns? So it will just add a lot more process and structure to addressing the issues. When you're stuck in the middle, you just don't have time to sit back and actually see the big picture.

Dean: Do you think there are a lot of companies out there today that just don't recognize that perhaps they may have issues with their banks, issues that are going to impact the future outlook for their business, albeit, maybe they're going to be deleveraged, the credit facilities won't be there in the same degree, the costs might be higher, so they really need to reposition themselves?

Vince: I definitely believe that. As the study indicates that a lot, over one third, have not actually increased communication with their lenders throughout this time, so really everybody's thinking that everything is business as usual, when in fact you're totally right — things have changed. There's more pressures on the banks, there's more pressures on the whole financial community.

Dean: So Vince, assuming you have a company that is proactive, manages its messaging to its bank very well, has a plan for its business and operating through this economic climate, how flexible, how workable have you seen banks on the opposite side of the table, quite frankly their financing partners, how do you see them working with the companies?

Vince: We've seen the two extremes, one of them being that depending on the business, they will be proactive and help them out, but on the other side, we're also seeing that if a company does violate a thirty plus relationship, is at risk nowadays. Pricing is going up. The banks are getting pressure themselves, keeping their capital ratios up, they've been increasing their loan loss previsions, and they really need to manage their risks, and they're being a lot harder on a lot of their clients.

Dean: So it's probably safe to say we've gone back to a bit of the traditional banking model where the banks have a cost of capital, perhaps increasing in this environment, and the risks are going to be worn by them so they're managing much tighter than perhaps they were in years gone by.

Vince: Definitely, and I think the reason why we feel that it's a lot larger of an extreme is because we came from a very loose credit policy the last couple of years, and we're going back to normal, but it seems that normal was so far away from where we were a little while ago that we think it's a huge extreme.

Dean: The credit crisis is at a point in time today we expected to have some legs to it; obviously it's not going away tomorrow. But I've heard the term used quite often called the new normal, the new normal for credit levels that will be out there. With that, and the changes that are out there whether it be in pricing, levels of leverage, things of that nature. What should companies be doing to rethink how it impacts their business model going forward?

Vince: Well I would say that you need more focus on creating financial forecasts and pushing that into your capital structure and really seeing how your business will work under this 'new normal'. I think a lot of businesses took advantage of the loose credit the last few years, and easy covenants, and grew their business and now there's going to be this contraction, and they really do have to sit back and say, "Can I work under this new financial criteria?"

Dean: So for some businesses the change in cost of capital and capital structure may make the business not viable in the long term, correct?

Vince: Definitely, definitely.

Helen: So Vince, if you had one piece of advice to your clients on dealing with their banker, what would it be?

Vince: Basically, I'd say a key success factor for dealing with this downturn is step back and analyze the general economy: its effect on your business, your customers, your suppliers. And then develop a detailed plan, communicate it to all relevant stakeholders, execute it, communicate it again, and the progress that you're having, and then revise the plan if conditions warrant it. And lastly, don't be afraid to ask for help if you need it, from any of your financial advisors.

Dean: Well thank you very much, Vince De Luca. This concludes this episode of Strategy Talks, part of PricewaterhouseCoopers Managing in a Downturn podcast series. I'm Dean Mullet, thank you for listening.

Helen: Learn more about dealing with your banker, you can read Vince's article on dealing with your banker, as well as the study that PricewaterhouseCoopers has done of private companies dealing with their banks, and that can all be found on our website at the Managing in a Downturn page at

Voice Over: In the next episode of Strategy Talks, Private Equity in a Troubled Economy, Helen and Dean talk to Peter Dale, national leader of PwC's Private Equity Practice. Peter offers an overview of how the face of private equity has changed recently, and what key challenges would be for the future. Here's a sneak preview of what Peter has to say:

Peter: We're definitely seeing a slow down. Private equity has been to the sidelines, there are deals happening, they're smaller type of deals and they're happening on different parameters.

Dean: This concludes this episode of Strategy Talks, part of the PricewaterhouseCoopers Managing in a Downturn podcast series. I'm Dean Mullett, thank you for listening.

Helen: And I'm Helen Mallovy Hicks. We hope you'll join us again soon for another episode. To download or to subscribe to this podcast series or to find more information on this topic, please visit our Managing in a Downturn website at

The information in this podcast is provided with the understanding that the authors and publishes are not herein engaged in rendering legal accounting, tax or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation. Copyright 2009, PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or as the context requires, the PricewaterhouseCoopers global network or other member firms of the network. Each of which is a separate and independent legal entity.

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Hosted by Helen Mallovy Hicks, a Partner and National Leader of the Dispute Analysis & Valuations Group, Strategy Talks is a series of audio podcasts that explore key issues affecting businesses in Canada, and share strategies that companies can use to help address them.