Commentary & Analysis
Giving Credit Where It’s Due: Lenders Say the Climate for Borrowing at Graph Expo Will Be Invigorating (Part 1)
Of all the knuckle-
By Patrick Henry
Published: October 22, 2008
Of all the knuckle-whitening news about the current economic turmoil, nothing has been more disturbing than the alarm over the drying up of commercial credit. Reacting to harsh facts and rumors of worse to come, company owners who didn’t know the TED spread from a bedspread have been tempted to pull the blankets over their heads in fear as they wonder where in the financial world the capital they need to re-equip their businesses is supposed to come from.
It would seem that for most business owners hoping to finance an investment in production machinery with someone else’s cash, the timing could hardly be worse. On the other hand could the moment be just right for certain would-be equipment buyers—say, printers?
Commercial lenders coming to Graph Expo next week are bringing their money with them, and they say that they’re ready to talk terms with printers who can make a good case for borrowing it. These financiers don’t deny that credit has become tougher to obtain, but they all agree that capital remains available, and even abundantly so, to qualified borrowers in these uncertain times.
As far as they’re concerned, printers with their eyes on new equipment remain a good risk, and they’re eager to share tips on what prospective borrowers can do to gain access to needed funds. To be sure, no one is tossing wads of cash around, and printers seeking loans still must be prepared to document the financial soundness of their businesses.
But essentially, if a printer can convince himself or herself that a new press is a sensible, well justified, and profit-building investment, he or she probably can use the same logic to convince a lender to furnish the up-front money.
To bank or not to bank?
When purchasing equipment, printers who elect not to use manufacturer-provided financing commonly turn to companies that specialize in lending to printers. These companies, which strive to be well informed about technology and business conditions within the industry, make funds available either as outright loans or as capital leases. (Both are financing mechanisms with different rules about eligibility and repayment.)
Printers sometimes also approach banks—traditional sources of capital with less knowledge of and therefore less tolerance for the kinds of risks that characterize the printing business. The good news for these borrowers is that although the bleak economic picture is causing bankers to behave more bankerly than ever when it comes to extending credit, their capacity to finance equipment purchases isn’t as constrained as all of the queasy stories about their liquidity might suggest.
According to John Hyde, vice president and senior consultant of the National Association for Printing Leadership (NAPL) (booth Grand 1), the banking industry’s present woes don’t affect the equipment financing side of the equation as much as they do lending for lines of credit and other purposes secured by the borrower’s receivables (as opposed to collateral in the form of hard assets such as machinery).
Credit financing is where the banks tend to tighten up first, says Hyde, who advises members of NAPL on financing, mergers and acquisitions, valuation, and strategy. But even here, he notes, borrowers are not seeing “the same kind of carnage” in terms of debt collection and other harsh bank practices that characterized previous downturns.
Still, says Hyde, banks tend to be less accommodating than specialized lenders, which understand that operating in a highly leveraged way is the nature of the printing business. A printer dealing with one bank probably should be talking with another as a backup, he adds. “Just open the door a little bit, so in case your existing bank is giving you a hard time, you have options that can be pursued quickly if needed.”
“Spotty” for some
Paul Reilly, a partner in Compass Capital Partners Ltd., describes the bank lending picture as “spotty—we see some printers with access and some without access to funds.”
“In some cases it has nothing to do with the printer at all,” he says. “If the printer's bank has suffered a loss of reserves due to poor investments, these banks are doing whatever possible to reduce loans at any cost. On the other hand, we see printers not suffering from the downturn and still enjoying access to additional funds.”
These printers, says Reilly, have long relationships with their banks and keep them apprised of both the good and the bad circumstances within their companies. The result is “a strong bond of trust between the bank and the printer” that can keep the former in the latter’s corner as a lender when the economic picture turns gloomy.
Nevertheless, Reilly thinks that bank borrowing opportunities for some printers will be limited. “Those firms that already have significant debt may be shut out,” he says. “Healthy printers will continue to have access to funds.”
The Perils of CFL
He also notes that printers using asset base lending (ABL) are better off in perilous times than those using cash flow lending (CFL). With ABL, he says, “during downturns the underlying assets for printers do not decrease as much as profits, and collateral remains strong. If, however, the printer is using CFL, a downturn may drive a disaster.”
According to Reilly, many segments of printing—particularly those depending on marketing budgets—will fall during a downturn. The risk is greater for printers serving publicly traded companies that must reduce marketing budgets in order to meet quarterly earning targets. “CFL borrowers will need to drastically reduce expense levels as not to default on CFL covenants,” he warns. “Industries that are less economically sensitive are better off with CFL than printers.”
Reilly readily answers “of course” when asked if Compass Capital Partners, a provider of financial advisory services to the printing industry since 1979, will continue to help printers find the ABL opportunities they need as they head to Graph Expo with their equipment wish lists in hand. Executives of other printing- focused financial providers respond just as positively.
Great Atlantic Capital Corp. (booth 3736), to be represented at the show by Jeff Shaner, executive vice president, has been funding investments in printing, packaging, and converting equipment for 22 years. Shaner says that now is a “great time to get a deal on equipment” if the reason for buying is good and the financing plan makes sense.
Robert G. Seeds, Jr., president of International Financial Services Corp. (IFS) (booth 4225), notes that IFS has been “aggressively lending” in the graphic communications industry for 28 years and is “very active with funds to lend today.”
At People’s Capital & Leasing Corp. (booth 1369), “the ability to lend is strong,” says Michael (Mickey) Urquhart, senior vice president of sales for the graphic arts financial division.
Steven Cubellis, senior vice president at RCA Capital Corp. (booth 3641), says, “Our deals range from $100,000 to $5,000,000, and we try to tailor each transaction to the specific requirements of the customer and vendor.”
Ports in a storm
At Graph Expo, the lenders will try to position themselves as dependable sources of capital for printers in an uncertain time—so uncertain that some banks have either abandoned the printing market or are in no shape to service it.
According to Seeds, graphic arts equipment purchases used to be financed with a combination of cash, loans from banks, and money from third-party sources like IFS. Today, he says, “the number of banks lending to industry has shrunk, and the third party lenders have become more important.”
Cubellis agrees. “Many banks and larger finance companies are pulling back or even leaving the printing segment of our market. Credit markets are tightening, and rates are unpredictable,” he says.
Although the lenders have relationships with banks, they believe that their distance from the banking industry’s now-turbulent scenario is what enables them to be responsive to printers. “We are independently owned and operated, not owned by a bank. Therefore, we have had nothing to do with the mortgage issues that banks have,” says Seeds. Shaner draws the same distinction: “Today, things have tightened, but they are not frozen, unlike the mortgage segment.”
Urquhart’s company belongs to a bank—People's Bank—but this institution, he says, has a healthy portfolio that does not involve subprime mortgages or credit cards. “Lending to the printing industry continues to be a big part of our plans,” says Urquhart, adding that People’s Capital has lent more to printers this year than it did last year.
Lending an ear
Urquhart believes that the printing industry will experience “more of a minimal impact than a major impact” as the commercial credit situation plays itself out. He notes that most lenders to the industry are specialists that understand what drives printers’ desire to purchase new equipment. They know that printers are primarily interested in increasing their efficiency, and they will acknowledge this as both a legitimate reason for borrowing money and a good justification for lending it.
“We are working in a challenging environment, but thankfully we are in the equipment lending business,” declares Cubellis. This means “we do not do real estate, or lines of credit, or credit cards. Therefore, we have not been caught up in the subprime debacle. We are fortunate to have a strong customer base and strong and stable banking partners.”
According to Seeds, another benefit of working with third-party sources like IFS is that they’re easier to deal with than banks. “We do not have the heavy restrictions and requirements, like massive down payments and restrictive covenants, that many lenders insist on.”
(In part 2 on Thursday, the lenders advise printers how to present themselves as good candidates for borrowing and how to expedite the loan application process.)
Editor’s note: this article includes reporting by Christopher Price, vice president of the Graphic Arts Show Company, the producer of Graph Expo 2008