Over the past four years, the increasingly desperate scramble for credit has cost corporate treasury staffs a lot of independence when it comes to dealings with their bankers. The price for scarce credit has not been high interest rates, but rather business packages that channeled cash management, custody, pension and investment banking services to the most generous lender rather than the best service provider. The practice has been pervasive enough to capture the attention of the Federal Reserve, which earlier this year put out guidelines on what qualifies as bank tying–that is, the illegal act of predicating offers of credit upon the award of other fee-based business–and even fined one particularly egregious transgressor.
Now, after nearly a decade of negotiating with banks from a steadily deteriorating position, the most alert corporate CFOs and treasurers have noticed that power is shifting, and naturally they are seeking ways to take advantage of what they perceive as newfound leverage. "The pendulum is starting to swing in favor of corporate treasuries. Banks are still in control of relationships, but that is about to change," says Anthony J. Carfang, a founding partner of Chicago-based Treasury Strategies Inc.
Why? First, to please the investment community rather than to cut ties to banks, treasurers are learning to live with less credit and more liquidity. That strategy is translating into a healthier balance sheet and ultimately a stronger bargaining position when it comes to their bankers. But second, and probably more important, credit is just more available and priced at levels that both lender and borrower can live with. "We're seeing a real upturn in the supply of credit. Banks would love to lend to corporations now," notes Meredith Coffey, senior vice president and director of analytics at New York-based Loan Pricing Corp. In the investment grade market, syndicated credits now are frequently oversubscribed after years in which they were hard to fill, Coffey reports. Upfront fees are coming down, sometimes to zero, and tenures are getting longer, sometimes out to five years, she adds.
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For instance, Air Products and Chemicals Inc., based in Allentown, Pa., is in the process of renewing its credit facility–something that has been a "painful" experience in recent years, notes Greg Weigard, assistant treasurer. This time, however, negotiations have been a pleasant surprise. "It looks like we'll get a five-year extension, something that would have been impossible a year ago," he says. "We seem to be in a stronger position."
Credit Options Expand
It's even evident in the below-investment-grade market, where borrowers have been coming back, sometimes every few months, to refinance and shave up to 100 basis points off their interest rate. So far, institutional investors have been quicker to offer lower rates than banks. "We've seen a ton of borrowers refinance," Coffey notes. Overall, $22 billion of corporate loans have been repriced this year. Because of lower spreads alone, the borrowers have cut their interest expense by a collective $150 million annually, Coffey estimates. "Considerable power has shifted to borrowers," she concludes.
Another element–at least for some companies–in the currently depressurized credit market: improved working capital management. CFOs and treasurers, thanks to advances in liquidity planning technology and heightened scrutiny from investors and regulators, have been able to get a better handle on cash flows. And that extended visibility allows them to predict their credit requirements with more precision as well, says Glen Solimine, vice president of sales for North America for treasury solution provider XRT Inc. "Armed with a pro forma statement of cash flows, a treasurer may have taken a five-year revolver to cover variability and uncertainty. With a more accurate liquidity plan, it turns out he only needs a three-year revolver. More banks are going to accept this reduced risk, bidding the costs down and resulting in a better deal for the company," Solimine explains. "The more confident you are in your liquidity numbers, the more accurate you can be with your credit requirements, and ultimately the stronger your hand is in negotiations."
It's all about having more options. Take Cadence Design Systems, a $1.2 billion San Jose, Calif.-based software company, for example. Cadence is about to discover the opportunities of shopping for treasury services without being tied to a credit group. The company completed a $420 million convertible bond offering last September and terminated its $375 million bank revolver at that time. "Now we have an opportunity to develop a plan and carry it out," observes James R. Haddad, vice president of corporate finance. To get a credit group large enough to spread the risk, "we had to deal with too many banks and worry about distributing operating services so we could keep them happy," he explains.
Without credit obligations, Cadence is free to pick best-of-class banks for the company's growing global markets and deal with fewer banks. Haddad doesn't know yet whether that will bring lower prices. He still has to deal with a shrinking pool of global cash management banks. "There are fewer choices, and the services market is less cyclical than the credit market," he concludes.
Shopping Around
But Haddad looks forward to doing the choosing. "We have the leverage we didn't have before to do what's best for us. Now, we have to do our homework and see where we come out," he says.
As is usually the case, however, already powerful investment-grade corporations have the opportunity to be the biggest beneficiaries of the swing in leverage, although bankers suspect that the deciding factor on whether a company is able to capitalize on the shift is more dependent on the astuteness of its financial managers. Only "our most sophisticated customers are already demanding better quality service, better prices and better technology," reports Dan Rosenstein, head of global cash management sales at Deutsche Bank. "Corporations have a new power to demand more from their banks, but it is only power if they use it."
One way to exploit this new leverage is to set banks against each other by putting more business out for bid and perhaps increasing the number of banks you use. A treasurer can also gain clout if you bring a fatter wallet to the negotiating table by outsourcing less core financial activities like check printing and invoice presentment. To get a "fatter" wallet, however, one may have to forgo best-of-breed providers in order to offer a package of adequate size to one primary vendor. When it comes to negotiating cash management prices, transaction volumes count more than credit quality or loan size, says G.M. Stetter, managing director at ABN Amro.
In 2003, Whirlpool Corp. organized an online auction and got banks to bid against each other for its card business. On the surface, that seems like aggressive negotiation, but it was a special case, not a major change in how Whirlpool deals with its banks, explains Frank Luongo, the director of treasury analysis. Effective bank negotiation for Whirlpool continues to mean shrewd management of its credit group. "We're on the spot to put as much business as possible in front of our credit banks," Luongo notes. "We're looking for business we can take away from nonbank providers and give to our banks to create a tighter overall relationship. It's all about 'size of wallet.' The bigger the wallet we bring, the better deal we can negotiate."
What Banks Want
Also, it is important for finance professionals to know exactly what type of business your banker really wants from you. "Smart CFOs and treasurers make it a point to know just how valuable they are to their banks and which banks put the greatest value on the kinds of business they have to offer," explains Jeff Wallace, managing partner at Greenwich Treasury Advisors. What's more, bundling can be a two-way street, he points out. "Banks are saying, 'If you want a credit line, give us capital markets business.' CFOs are saying to investment banks, 'If you want to keep our capital markets business, pony up for our credit syndicate.'"
So how long is this kinder, gentler world for CFOs and treasurers expected to last? As far as credit is concerned, "Banks go in cycles," observes ABN Amro's Stetter, who before becoming a banker was a treasury executive at Merrill Lynch. "They lend to everyone. Then they won't return your call unless you are investment grade." But Stetter points out that the consolidation in the banking industry can only work against treasuries in their bank negotiations. In other words, act quickly or repent at leisure when it comes to taking advantage of negotiating power. "If you remain complacent," cautions Henry Waszkowski, head of Wachovia Corp.'s treasury and financial consulting practice, "you lose the opportunity."
David O'Brien, assistant treasurer at EDS Corp., which is based in Plano, Texas, agrees. "We've been through a sea change. Bank mergers and the withdrawal of foreign banks from the U.S. credit markets have made credit a permanently scarce commodity," he observes. "Today, banks know their costs and are pretty savvy about pricing. Prestige just doesn't cut it like it used to."
And admittedly, the current climate for bank consolidation would augur fewer players in a marketplace, more concentration of power and ultimately less negotiating wiggle room for companies. Consolidation has made a handful of large banks the undisputed masters of the loan syndication market. "Banks will never go back to doing business the way they did," cautions Wachovia's Waszkowski.
In fact, they can't. Banks don't have excessive profit margins in their cash management services to give up, Waszkowski says. They like fee-based business on top of lending because it requires little capital and therefore improves return-on-capital calculations, he says. If the denominator (capital) stays fixed and the numerator (revenue) grows, the ratio gets stronger, he explains.
Moreover, international banking regulations have forced banks to allocate more capital to lines of business, based on risk, and forced banks to become explicit in calculating their risk-adjusted returns on capital (RAROC). Bankers keep a separate P&L for each major account, and they won't be negotiated very far from their RAROC targets, Greenwich Treasury's Wallace suggests. EDS' O'Brien agrees. "You can still negotiate price," he says, "but within a narrow band."
Reducing prices, however, need not be the only goal of bank negotiations. Improved service can often lower a company's costs. So while the fee is still steep, the bottom line for treasury is far more palatable.
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