Commentary & Analysis
Show Me the Money? Don’t Look at Us, Say the Banks
It wasn’t supposed to be like this. By now, the economy should have picked up, printers’ prospects should have improved, and the banks should have responded by letting some sunlight into their vaults when borrowers from the industry came calling. What happened? Although the nation’s general banking crisis may be over, says Tom Williams, partner, New Direction Partners, there’s been little improvement in the availability of credit for business and equipment financing.
By Patrick Henry
Published: August 24, 2010
It wasn't supposed to be like this. By now, the economy should have picked up, printers' prospects should have improved, and the banks should have responded by letting some sunlight into their vaults when borrowers from the industry came calling. What happened?
Although the nation's general banking crisis may be over, says Tom Williams, partner, New Direction Partners, there's been little improvement in the availability of credit for business and equipment financing. Data from federal sources and the findings of a survey by one of the finance industry's leading trade publications paint the same discouraging picture: tighter credit requirements, fewer loans, and a smaller range of options for printers in need of cash to buy equipment or fund M&A transactions.
According to Williams, of the 40 institutions surveyed by The Monitor in its annual ranking of the top U.S. bank leasing and financing companies, four historically provided significant levels of financing to the printing industry. The largest of them, he says, is not currently making loans to the printing industry. From 2008 to 2009, the other three experienced sharp decreases in their loan origination rates—the volume of new lending that they do with printers. It's an indication, says Williams, of how "very selective they've become regarding the credit quality" of their loan applicants.
Watch Out for the "Watch List"
The hesitancy also stems from the damage done to the banking sector by the recession. FDIC data cited by The Monitor show that 94 banks have been closed since the beginning of 2010—42 more than in same period in 2009. With a total of 141 closings, 2009 was a bad year for banks, and by the yardstick of closings, 2010 is on track to be worse. Now reportedly on the FDIC watch list of "problem" institutions are 775 banks, two and a half times the number listed at the end of the same period in 2009.
Lenders that survived the turbulence of 2008-2009 will be happy to put this dark period behind them. Among The Monitor top 40, 58% saw a year-over-year increase in loan delinquencies, and better than three-quarters (77%) reported higher net charge-offs: losses taken after the liquidation of uncollectible loans.
Since then, there have been signs of a bottoming-out and hope for a return to stability next year. The majority of respondents to The Monitor survey expect their loan origination rates to increase this year, and the loss rate from charge-offs has moderated as well. About one-third of those surveyed expect to see a return to some degree of "normalcy" this year, while better than half say it will come in the first six months of 2011.
Nevertheless, says Williams, from the perspective of printers in need of cash, "there's no indication at this point that things are getting better." Until recovery occurs, he adds, there won't be many good alternatives for printers who find themselves shut out of traditional sources of financing.
Williams says that some clients of New Direction Partners have obtained loans guaranteed by the federal Small Business Administration (SBA), which manages a variety of lending programs for small firms. But the caveat, he says, is that these loans—which are typically originated by private-sector lenders—generally require personal guarantees and frequently the pledging of personal assets like home equity as additional collateral. If the borrower is a printer who becomes mired in financial difficulties, warns Williams, "you could lose everything that you've worked 30 or 40 years to build."
Vendors Retreat as Lenders
Once upon a time, through their financing subsidiaries or their affiliations with third-party lenders, print equipment manufacturers were an alternative source for equipment financing. But a rash of loan defaults and repossessions, says Williams, has prompted the heavy-iron manufacturers to curtail or eliminate these programs. Also restricting the availability of cash for equipment purchasing is the fact that many of these loans, like over-leveraged home mortgages, are "under water" with unpaid balances far exceeding the current worth of the machinery pledged as collateral.
There's more flexibility for those wishing to acquire digital printing systems, which often can be leased from the vendors in packages that include consumables and service. But, smaller companies and those deemed credit risks may have to offer personal guarantees in order to qualify for these leasing deals, Williams says.
If raising money for buying equipment is difficult, funding the acquisition of another company belongs with the labors of Hercules. Williams says that although printing companies with strong balance sheets, cash in the bank, and consistent profits still have a shot at securing M&A financing from lenders, they're not typical of the industry at large. For those who can't demonstrate the "significantly better credit quality" that the banks now are insisting upon, says Williams, this kind of borrowing is "almost impossible now."
"Don't Give Up"
Fortunately, however, there can be paths to successful M&A transactions even in the absence of traditional funding from the banks. "Don't give up just because of the financing," urges Peter Schaefer, partner, New Direction Partners. To insure survival in this time of industry consolidation, he says, every printing firm should position itself either as an acquirer or as an acquisition target. In either case, the trick is to "be creative" in structuring a deal that doesn't require a large amount of cash to make the merger happen.
To moot the need for financing, New Direction Partners favors the type of transaction known as a tuck-in: an acquisition in which the seller is paid in the form of an earn-out based on future sales. In a tuck-in, says Schaefer, the buyer can proceed with minimal risk and without tying up hard-to-come-by capital. By agreeing to forgo cash at closing, the seller can close the deal on favorable terms that might not be achievable otherwise.
"Clearly 2009 was a year when you had to be a masochist to be a banker," declares The Monitor. Printers also remember it as a year when there was plenty of suffering to go around, particularly when it came to securing loans. Schaefer and Williams agree that although the pain is subsiding, the comfort zone of ready capital remains out of reach. They urge printers to seek expert advice about other strategies until "normalcy," whatever that may turn out to be, comes back to the much-battered banking industry.