There have been dramatic changes in the banking industry and the techniques used by bank officers and their counsel to attract borrowers and consummate transactions.
This has caused bankers to adopt budgets aggressively seeking to capture market share in corporate finance and prompted a significant number of qualified bank officers to leave banking and enter industries that compete with banks for commercial loans.
The goals of the bank officer should be to develop new sources of business and to close transactions quickly and efficiently without sacrificing the basic forms of protection the bank may require in the event the transaction turns sour. Two elements are critical to this equation: timing and creativity.
Initially, the bank must adopt clear and precise internal procedures for the expeditious review and analysis of a potential transaction because, while a bank considers whether to offer a credit facility to a prospective borrower, that borrower continues to be solicited by other lenders. It's not unusual for prospective borrowers to be contacted by competitors right up to the day the transaction is consummated.
As pricing and structure become more uniform, only the element of added value will distinguish one bank from the next. Creativity counts. A bank officer should anticipate a prospective borrower's requests as well as the terms a competitor may offer.
For instance, if the bank decides that a full personal guarantee would not be required but that a limited or stepdown guarantee would suffice, then those forms of guarantee should be offered at the outset. That point should not be held as a concession to be used during negotiations, since it could be offered by a competitor in the interim.
Once the transaction has been reviewed and approved, the bank officer will normally produce a letter outlining the proposed terms and deliver a simple proposal or commitment letter to the prospective borrower. This stage will set the tone of the relationship throughout the negotiations and closing. Be certain that the borrower thoroughly understands the transaction and there is no confusion about the meaning of any key term or condition.
For instance, if the loan is to be repaid on a demand, time, or covenant default basis, or a combination of these, then the proposal-commitment letter should clearly say so. If the loan is to be guaranteed, to state simply that the principal shareholder will "guarantee" the loan is ambiguous.
Although the lender usually requires a payment guarantee-that is, the ability to proceed against the guarantor, independent of proceedings first against the borrower-the borrower might presume that the guarantee is simply a guarantee of collection. The latter means that a bank must exhaust its remedies against the borrower before seeking any payment from the guarantor.
Pricing can also cause confusion, particularly when dealing with Libor loans. If pricing is to be based upon the London interbank offered rate, does that mean simple Libor as quoted in The Wall Street Journal or other publications, or is pricing actually based upon a Eurodollar rate, meaning Libor as adjusted by any applicable reserve requirement?
Counsel should be consulted early to review the transaction and the terms of the proposal-commitment letter to ensure that, among other things, the deal has been structured properly. If the bank officer independently prepares the letter, it is conceivable that it may have to be modified for structural or other considerations.
The letter should be a simple document containing only the essential business terms of the transaction. The remaining business terms and the legal terms should be addressed in the loan documents themselves. Negotiation time should be spent on the loan documents rather than the letter.
In fact, whenever possible, proposal-commitment letters should be avoided completely and the transaction should proceed directly to documentation once basic terms have been agreed to by the prospective borrower.