‘Un-bankable’ is not a dirty word

“Bankable” – it’s a phrase we hear regularly from debt advisers and finance brokers in Australia and New Zealand - suggesting the quality and attractiveness of a particular deal is so good you (and a friendly bank manager) would bank on it!

In reality, many mid-sized borrower clients have financing requirements that fall outside traditional bank parameters.

In many cases, referring to a deal as “bankable” may be true at face value.

Perhaps the client has high quality assets and/or strong cash flows which put them squarely in a bank’s lending parameters.

This, however, does not account for the unique nuance of every deal.

For example, borrowers often need or simply desire a high degree of flexibility to meet their individual and unique funding requirements.

The flexibility being sought could relate to loan term, capitalisation of interest, leverage, or covenants.

Other complicating factors may include outstanding liabilities with the Australian Tax Office or having exposure to clients that are not considered mainstream or conventional.

Any variation of these factors requires an alternative approach that offers a level of lateral thinking and nimbleness that won’t be found within a major bank.

Suddenly, the deal has become “un-bankable” – but that certainly doesn’t mean there isn’t a powerful financing solution available. Nor does it mean the deal is too risky or does not make economic sense.

Working within the strategic capital arm of a private credit asset manager (GCI), we meet advisers and borrowers every day that have been led to believe the best financing solution is one provided by a bank.

Unfortunately, the term “best” is often a substitute for “cheapest”, which doesn’t account for the reality that mid-market borrowers are becoming more sophisticated and nuanced in their financing solutions.

This is coupled with the fact that major banks – faced with an inability to meet the level of flexibility required by mid-market borrowers – have a decreased appetite to cater to this fast-growing group of clients.

It’s reasonable to think that this gap between a mid-market borrower’s disposition and a bank’s financing appetite may indicate a deal is “un-bankable”; but this should not be confused with “unworkable”.

Instead, this type of scenario presents a compelling opportunity for borrowers to tap into the growing availability of non-bank financing options to achieve their goals.

‘Un-bankable’ in Practical Terms

There are plenty of examples of so-called “un-bankable” businesses obtaining specialised credit solutions that enable transformation of their business through growth or restructuring.

In our experience, we’ve found that every borrower client has a unique funding requirement based on the stage of business evolution they find themselves in.

Take for instance a protected cropping business, a pre-revenue business that found itself at a critical juncture in their growth journey.

The company was seeking a debt solution to expand into a new glasshouse facility while avoiding a heavily dilutive equity raise.

Yet despite having valuable assets and a promising market, the expansion capital went beyond the remit of traditional lenders.

The potential of the business was evident, and it was clear that the right growth solution could propel them towards success.

That solution was found in the form of a loan to refinance the existing lender and provide additional capital for the expansion project.

Fast forward 16 months, following a period of sustained cultivation and strong sales, the borrower was able to refinance GCI on the loan.

Non-bankable deals can also present in the form of a restructure. One example that comes to mind is a dairy farm operator based in New Zealand.

This organisation encountered a financial setback when their incumbent bank appointed receivers due to the non-repayment of the existing loan upon maturity.

GCI provided a loan to the borrower to repay the bank in-full, but the real value is in the accompanying financing arrangement.

GCI is actively working with the borrower to undertake non-core asset sales and to reposition the business for a refinance with a traditional lender.

We have also funded transactions in the waste management and financial services industries which have involved disputes between shareholders.

These disputes have often related to which shareholder can buyout the other.

Given the protracted timeframes for these situations to resolve themselves, GCI’s funding offered a liquidity source which would not disturb the assets of the business which was in the shareholder dispute.

The examples above demonstrate just a sample of the situations we see daily, which is why it is important to recognise that “un-bankable” does not have to be a business roadblock.

It represents opportunity for borrowers to attain what conventional banks may not provide.

Whether it’s in emerging industries like protected cropping or established sectors like agriculture, tailored financing solutions can make the difference between stagnation and success.

Trusted business advisers, like accountants, play a particularly important role in steering clients to explore alternative financing choices.

The key is helping clients look past the conventional, to not confuse ‘un-bankable’ with ‘impossible’ and to seek out financing solutions that are in the best interest of the client and which solve their unique funding needs.

By Hugh Selleck, Managing Director, GCI