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Hampton Roads Association for Financial Professionals December 14, 2010 Confidential – For Discussion & General Information Purposes Only Borrowing 101 A high level overview of why companies borrow and how they go about it. Tips to help navigate where to turn, and what should be provided.
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Eastern VA Regional Commercial Banking 2 Wide variety – type, size, credit profile Public & Privately held Government, Institutional, Non-Profits, Banks... Start ups – early stage – emerging Established – growing Challenged – difficult times / cyclical, economic, industry Event driven – ownership changes, mergers and acquisitions, buyouts Who borrows?
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Eastern VA Regional Commercial Banking 3 Why do companies borrow? Short term needs General working capital Seasonal To fulfill large orders Dividends / distributions / taxes Liquidity Long term needs Capital expenditures Technology equipment Plant / distribution machinery & equipment Real estate Research and development Expansion Liquidity
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Eastern VA Regional Commercial Banking 4 Capital Structure Basics: Debt vs. Equity - Owners - Public / shareholders - Cooperatives – members - Angel - Mezzanine - Private Equity Groups Investors - Owners’ equity or members’ capital - Retained earnings - Mezzanine / Junior Capital - Subordinated Debt Equity Assets – Liabilities = Equity
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Eastern VA Regional Commercial Banking 5 Borrowings: Term, Tenor, Type Secured vs. Unsecured Collateralized / Cross-Collateralized Structures - Revolving Lines of Credit 364 day, 1 year, 2 year, 3 year, + Borrowing base, non borrowing base - Term loans 5-7 year Loan to values, advance rates, formulas Lease vs. Loan: obsolescence, tax impact, reporting - Mortgages 10, 15, 20 year amortizations, bullets - Senior Notes / High Yields / Bonds - IPOs / Secondary Offerings - Tax Exempt Financing / Special Programs
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Eastern VA Regional Commercial Banking 6 Borrowings… Guarantors - Affiliated companies, parent companies - Owners - Collateralized guarantees Covenants - Liquidity: earnings or profits, CA/CL, cash or excess availability - Net worth: tangible net worth - Leverage: TL/NW, D/TNW, Sr Debt / EBITDA - Coverage: Interest, Fixed Charge Coverage
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Eastern VA Regional Commercial Banking 7 Time to Borrow: Starting Point - Amount needed - Sources – collateral, cash flow, other - Uses – What will proceeds be used for, and over what time period? - Financial statement condition - Business trends, outlook - Owner plans long term / strategy Self Assessment
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Eastern VA Regional Commercial Banking 8 Time to Borrow: Where to Turn Banks: local, regional, national, global Commercial finance companies Specialty lenders Equipment finance providers Factors Asset based lenders Purchase order finance providers Investment bankers Government backed programs / SBA
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Eastern VA Regional Commercial Banking 9 Time to Borrow: Where to Turn (continued) Trusted advisors – CPAs, Attorneys, Bankers Other companies – referrals / testimonials Industry associations Signs / Media Internet
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Eastern VA Regional Commercial Banking 10 Be prepared: Questions Asked Company structure Ownership Key management team History Locations / domestic, international Operations: buys from, sells to, processes (sales, mfg, delivery) Internal vs. external contributors Contracts, Bids Financial performance / trends / past and future Competitors Differentiation / Niche / Strengths Weaknesses Outlook / strategy
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Eastern VA Regional Commercial Banking 11 You may be asked to provide: - Financial statements: 3 years, 4 years, more - Budgets or projections: 1 year or more, monthly/quarterly - Tax Returns - Personal financial statements: owners / principals - Top customers - Accounts Receivable - Accounts Payable - Inventory - Machinery & Equipment - Real estate / Locations - Appraisals Be Prepared: Information Requested
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Eastern VA Regional Commercial Banking 12 Be Prepared: Ongoing Reporting Requirements You may be asked to provide ongoing: - Financial statements – monthly, quarterly, annually - Financial statements preparation – compiled, reviewed, audited (firm utilized) - Covenant compliance certificates - monthly, quarterly - Borrowing base certificates - daily, weekly, monthly, quarterly - Asset listings / verifications - Collateral reports - Field exams / collateral audits or appraisals
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Eastern VA Regional Commercial Banking 13 Be prepared: Questions to Ask Fit / Match - Ability to address need - Culture, institution - Short term or long term solution Solution Analysis - Is need provided for - What costs are involved - Can company continue to meet requirements: whether reporting, management interaction, covenant compliance Approval Process - Steps involved - Who approves: signatures or committee - Timing Closing Process / Funding - Documentation - Appraisals, Other - Timing
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Western Mid-Atlantic Commercial Banking 14 Questions & Answers Susan L. Miller Vice President, Regional Business Development 804-697-6748 Office / 770-235-4488 Cell Susan.l.miller@wellsfargo.com Wells Fargo Bank, N.A. Eastern VA Regional Commercial Banking Office 440 Monticello Avenue, 11 th Floor Norfolk, VA 23510-2372
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