How to Lose a Banker in Ten Minutes
My experience as a project and structured finance lender was that fewer than 10% of projects were sufficiently well developed for proper consideration when they were first brought to the bank’s attention. I usually needed only about ten minutes to review and send the deal back to the project developer for substantial additional work, which in many cases was tantamount to rejection. This often left me frustrated as most project teams were earnest, hard-working, and well-intentioned.
Very often, applicants were developers in the renewable energy sector, where project teams often lacked project finance experience. Applicants were trying to “do well by doing good” – trying to finance clean energy projects for the benefit of the developing world. While turning away deals left me disheartened, I knew misleading developers would only hurt them in the long run. They would just keep making the same mistakes.
This repeated saga inspired me to deliver a speech at a renewable energy financing conference in Long Beach California entitled “How to Lose a Banker in Ten Minutes”. I listed the key “faux pas” committed time and time again and scripteda “What Not To Do” speech, inspired by the Kate Hudson and Matthew McConaughey movie “How To Lose a Guy in Ten Days”, using the doctored movie poster pictured above as an attention grabber. In the film, Kate Hudson’s character – Andie - uses Matthew’s character – Ben – as a Guinea pig in an article about all the things women did to “lose guys”. Andie’s intentional faux pas included dragging Ben to a Celine Dion concert the night of a big Knicks game and making a visible and clingy appearance on boys’ poker night.
The speech was a big success – eliciting lots of chatter, laughs, agreement, and – I thought –education on what not do in presenting an infrastructure deal to a bank. That was until, when at the evening cocktail reception, someone approached me to congratulate me on the speech and introduce a project. Within not ten minutes, but one, he did all of the things that I had just told the group not to do. So, there may have been entertainment, but not as much learning as I thought. Below is my attempt – again – to educate professionals operating in the global project finance arena.
My first suggestion is Lead in with Your High Level Contacts. Demonstrate how these relationships are the key to your success. I cannot count how many times I heard about high level contacts and relationships. Typically the contact was with the Ministry – the Deputy Minister or Minister of a key department. Sometimes it was with the Prime Minister or President. The higher the better most thought. Bankers think something else. Deals that arise because of key political relationships are either not real or highly vulnerable – around only long enough for the next developer to come around and request a meeting. At the worst, the high level contact can conjure up concerns of bribery or corruption. Serious developers and borrowers have contracts, sales track records, or both. Anyone touting a high level political contact as an opener is labeled as “not serious” and lacking substance. I suggest an MOU signed by the King if there is one.
If the banker is still in the room after that, Tout the Project’s High Rate of Return. Most people can’t understand why an advertised rate of return is bad and that is why this mistake is so common. Why are high returns bad? First of all, bankers do not really care what the rate of return is. Banks care about “debt coverage” – how much cash margin or coverage there is to pay debt, or about “debt leverage” – the ratio of debt and equity in a deal. Terms with the word “debt in them” – get it? Return is an equity concern – better projects deliver more return to equity holders. Debt just gets paid, hopefully on schedule. Banks are also unimpressed with high projected returns because returns are just projections loaded with assumptions. The higher the return, the less credible the deal – I suggest a 40% IRR.
Touting high returns only raises flags, especially to lenders of last resort such as the IFC or Ex-Im Bank. If the developer is making so much money, why are they asking such an agency for financing? What’s wrong? Or, if there is so much money available, maybe the bank should “sweep it” – have some debt prepaid so that equity isn’t all paid off before debt is. For that reason, large sophisticated sponsors go to great lengths to conceal returns. While transparency is best, I would give brownie points to developers who at least tried to keep profits under wraps.
Use a “Hotmail” Web Address. An AOL account or a Gmail address will do, but most of the really questionable deals all seemed to use Hotmail addresses. Small parties just starting out or just forming a special vehicle company may not have a website or a proper email address at first, but it’s not really that hard to get a domain name. Still somehow, parties came seeking serious finance – without a serious email address. This put an immediate black mark on the borrower. One business development specialist in our group would almost completely discount a deal’s probability of success just for the lack of a professional email address. Once a borrower has a real email address, and a business card and company materials to confirm, it’s a whole new world. Want to lose the banker fast – Hotmail it is.
Banker still awake? Then Sell the Project Technology to Banker. How can it possibly be bad to sell the technology to the banker or talk up the product? Aren’t the project’s technology and the products it makes what makes money to pay back debt? It is, but that doesn’t matter, because – here’s the big mystery – the banker is not the one buying the products! Even if the banker is totally wowed by the technology it doesn’t matter, not unless the bank itself is willing to buy the product, which it never is. In looking at large infrastructure or other projects, banks want to see long-term contracts with strong terms to sell products to credit-worthy buyers, or at least a deep market with a strong track record where competing projects have higher costs. If you really want to lose your banker, then go on and on about what a revolutionary breakthrough the project represents. That way, the banker may nod off, or better yet – get worried about “new technology risk”, i.e., the risk of developing and commercializing a brand new technology, a risk that most banks will not assume. I suggest cold fusion technology.
If there is any one left in the room, Assume Success. There are lots of easily available competitive advantages you can assume, such as access to fuel source or of a short term market failure that will make a new project a big success. Developers of biomass projects using agricultural products or waste for fuel or waste to energy deals using municipal waste to generate power or produce fuel specialized in this tactic. Banks would impatiently tap fingers on the table when developers got going. The key to success for these projects was always their ready access to agricultural or municipal waste within a specified radius of a project. To make their point, developers would draw circles around the project and identify how much agricultural or municipal waste was produced and discarded within each circle. Developers would claim that there was so much cheap fuel available within the project area that, even without supply contracts, the project will earn large profits from a consistent supply stream.
Assuming your own success is a great tactic for losing a bank because challenging assumptions only takes a few minutes. What could go wrong with easy access to free fuel within a few miles of a project? To start with, agency and other lenders typically give credit to what is contractually committed and sure to be available. Second, there are more things that can and will go wrong with supply from agricultural and municipal waste. Bad weather can intervene, or there can be problems with collection and processing mechanisms for waste. Digging deeper, relying on a large number of contracts from farmers or municipalities means lots of short term agreements with parties with uncertain credit.
Ultimately, the whole premise for assuming one’s own success is just wrong. If there is a magic bullet such as a reliable stream of waste for power, the nasty old free market always catches up with you. Other projects pop up and increase market costs. Remember when corn prices rose to such high levels? The culprit was a large number of ethanol projects that used corn – many projects went bust when corn feedstock prices rose. There is simply no free lunch. But, to lose the banker, invalidate those antiquated economic principles and assume a really great magic bullet that allows you to print money.
If there is still one person in the room – Highlight Great Unmet Need as a Selling Point. There are, quite sadly, millions of people in Africa and other parts of the world that lack access to power. There is a dearth of refining capacity throughout many parts of Latin America and Asia. In spite of economic growth, many places throughout the developing world lack access to basic products. A banker will see this lack of development as a sign of credit weakness, before believing economic growth signals credit strength. Power in Africa is scarce mostly because there is too little income to pay for it, or because regulatory and political systems are so weak or corrupt that there is no money to pay for power. Bankers first look for the money that will ultimately repay the debt – they’re funny that way. The losing strategy? Pick a really poor country and proudly proclaim no one there can afford to buy anything.
One last pointer – Go Big or Go Home – and you will go home. You can also Go Small and Go Home. Make the project really big with layers of infrastructure so that it’s complicated with huge loan exposures. My favorite was a wind farm that was placed on ships and then connected to a new electricity grid that powered a refinery and petrochemical project. Billions of dollars – the presentation had the predictable effect of scaring several banks. Banks prefer reasonable exposures that can be managed within the boundaries of the sources of credit, but if you want to clear the room, a complex, multi-billion dollar deal is better. A very small project is better than an enormous project, but can also create problems, especially for project finance. It can cost as much, or more, money to project finance a small deal as a big one. Banks would prefer that smaller deals have bank guarantees or other structures, but to lose the banker’s attention, insist that the small deal be financed through project finance.
Next Steps - These are the basics and most apply to new developers, but a surprisingly large group of experienced borrowers will continue to make these mistakes. If you think you or your deal is different, think again. Once you have really learned these lessons, there are still many more subtle ways to lose a banker. In doubt – call us - we can help.