Cutting or limiting the number of banks in a revolving credit facility emerged as one of the challenges facing some members of NeuGroup for Capital Markets during a recent virtual session titled Revolver Renewal Strategies: Sizing, Structure and Bank Relationships. One member described his approach to paring down a banking group as “more art than science,” but the discussion among peers made it clear this is not a paint-by-numbers art form. - “We have too many banks—and more want to come” into the banking group, one member said. Her company’s large global footprint means it uses the services of more international banks than it has room to include in its revolver. Some banks in the group, she said, want more fee-generating business “but cannot really do much.”
- The share-of-wallet issue resonated with another member who mentioned banks that make “noise” about fees but “don’t add strategic value.” He echoed the first member in asking how to trim banks from a revolver.
- Share of wallet is not the only concern for the first member. “We don't have the resources to maintain those relationships,” she said. “I feel like it is not generous to have them on the facility and you never talk to them.” One factor constraining her from dismissing banks already in the revolver is the “ding on the relationship manager” who will assume they did something wrong even when that’s not the case.
- Another member described needing to part ways with a foreign bank in a low tier of his revolver, an experience he said was “hard” for the bank. In that case, the treasury team scheduled a call with a managing director at the bank to explain the decision was based on business needs and “not anything they were doing wrong.”
Finding other ways to say good-bye. Another member cautioned, “You don’t want to fire a bank and you don’t want them to fire you,” in part because you may need to work together in the future. Some banks not satisfied with their wallet share will eventually “back out” of the revolver, eliminating the need to push them out, he said. He also recommends finding banks “that don’t bother you” about wallet share.
- Some banks, he said, want to build a book of business with, say, health care companies and are happy to be in a lower tier of a revolver (committing less capital)—and don’t complain about not getting enough fee revenue from trading or capital markets activity. “Then, every time you're renewing, it's seamless. And there are a handful of them out there, you just have to find them.”
- The member with too many banks agreed and referred to foreign banks seeking a presence in the U.S. that fit this description. “Some of the Chinese banks, they’re easy, they don’t bother me,” she said. “They don’t want to be in the league tables” for bond underwriting. “So I like those banks.”
The big picture on bank relationships. The broader topic and process of bank relationship management often come to a head when revolvers are created and renewed. Paul Dalle Molle, a former relationship banker and now senior executive advisor at NeuGroup, recommends that banks and companies take a “no surprises” approach built around transparency and frequent communication. - “Perhaps the worst thing a company can do is to let bankers expect some level of fee-generation and then not deliver,” he said. “I have seen that happen especially when treasurers and ATs are overruled by CFOs and CEOs who have their own coterie of banks to reward” for high-fee events including capital markets and advisory mandates.
- Partly to avoid those kinds of unmet expectations, one member expressed a view that is rarely if ever heard in discussions with treasurers or their bankers: He advocated that corporates in a position to do so disconnect the lending facility or the size of a bank’s commitment from the business they award. Acknowledge that a “revolver is a money loser” and tell banks, “It's got nothing to do with the business that we are going to give you,” he said.
- His cash-rich company—which rarely issues bonds—is able to do this in part because banks want a “premium name in their portfolio for marketing rights,” he said. “It depends upon what kind of leverage your company might have and how many times you need to go into the bond market. It depends on your business model and financial position.”
Revolver reality check. Another member takes a more nuanced, balanced approach that is far more typical of the reality facing most NeuGroup member companies. It recognizes that banks must set aside capital when committing to revolvers and that the facilities are “break even at best,” he said. But, he added, a commitment of capital is “like a ticket to the party”—one that doesn’t guarantee anything but is essentially a requirement to participate in business that generates higher fees.
- “We don’t explicitly make the statement to the banks that the size of your lending commitment is not relevant,” the member said. Instead, his team makes clear that the revolver is important, but represents just one factor in awarding business. He noted a key determinant is whether a bank is “actually adding value” through ideas, execution and performance.
