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Best Practices: Negotiating a Credit Facility

  • By Nilly Essaides
  • Published: 11/4/2015
talksunclearWith the prospects of higher interest rates and Basel III regulations around the corner, more banks are encouraging their corporate clients to renegotiate their credit facilities. But the process of renegotiating a revolver is not cut-and-dry. A lot depends on the company’s creditworthiness and the group of banks it engages. An upcoming AFP Guide, produced in partnership with law firm Hunton & Williams, “Negotiating and Complying with Credit Agreements,” due out in early 2016, explores how treasurers negotiate their secure and unsecured credit facilities, with an eye toward compliance with negative covenants and restrictions.

For example, Granite Construction has a secure, three-year, $215-million facility, with a relatively small group of banks. The facility was created in 2012 and will come due in 2016, which is why Jigisha Desai, CTP, vice president of corporate finance and treasurer, is currently negotiating an extension and better terms. Desai offered two best practices for treasurers as they prepare to negotiate credit agreements.

Select the right banks. Getting the right banks to be in the group is critical, according to this seasoned treasurer, who has negotiated multiple credit facilities. “It’s very important that my bank group is comprised of banks that understand the engineering and construction sector,” Desai said. “The facility will have covenants and you may need waivers occasionally, because of the cyclical nature of the business. You need banks that will not overreact because of one bad quarter.”

Desai spends a lot of her time pre-screening and talking honestly with the banks about the company. Granite is a public company, and she advises banks to read as much as they can about it and understand its performance. “If one quarter we don’t make forecast, don’t overreact,” she said. It’s easier since the company is not looking to set up a very large facility. Denai said she’s seen situations with her peers when one or two banks put the company in their workout group because they got spooked by a bad result. “Take the time to choose banking partners wisely.”

Have the right controls. “We live in the world of too much compliance,” Desai said. She encouraged people to ensure there are proper checks and balances. “In my group, the treasury manager reviews the compliance certificate. While I have to ultimately review and sign, I don’t look at it to the extent staff does. The controller and I have ultimate review. It’s also SOX control,” she said. “We meet with the PwC auditor as part of closing. We talk about covenants. We have enough checkpoints that if it’s triggered something people know about it. One person can’t do it all; get enough people involved.”

A longer version of this article will appear in an upcoming edition of AFP Exchange.

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