Daniels Executive Education Corporate Debt workshop provides strategies for borrowing money, managing debt
Istanbul’s Grand Bazaar is a shopping experience unto itself. Dating back to the 15th century, covering 61 streets and 4,000 individual shops, merchants hustle and hawk a vast array of goods—from rugs, jewelry and clothing to teas, spices and soaps—in an environment that overpowers the senses.
These days, shopping for a corporate loan isn’t entirely dissimilar to a stroll through the Grand Bazaar, with customers looking to find the right goods at the right price from the right merchant.
Obtaining a business line of credit or a term loan to finance an acquisition used to be a matter of visiting a federally chartered bank, speaking face-to-face with a banker, completing an application and providing a credit history and references.
It wasn’t effortless, but the process allowed you and your banker to become acquainted and, if business was good, yielded a productive, career-long working relationship. Your banker knew you and understood your business. You knew the banker and the bank’s risk appetite.
But times have changed—considerably—according to Ron Rizzuto and Randel Lewis, both faculty of the Executive Education program at the Daniels College of Business. In September, the pair will be teaching a three-day corporate debt course, taking a closer look at today’s banking relationships—not all of which are as strong as they’ve been in the past.
“In today’s world, less than 30% of corporate borrowings occur through commercial banks,” Lewis said. “The vast majority now are through unregulated, non-chartered lending organizations, which can range from aggressive hedge funds to more middle-of-the-road private equity groups. Some of the biggest lenders in the market now are funds run by Fortress, Blackstone, Apollo and their contemporaries.
“We’ve gone from a highly regulated, highly structured market through most of the 20th century to something that is very free form and can be quite aggressive,” Lewis continued. “Banks were notorious for hundred-page credit agreements. Now, many of these unregulated entities have decided that lending money doesn’t need to take hundreds of pages, which has its advantages, but also some considerable risks if key issues are left undefined.
“And unlike banks, they’re not limited in the way they can enforce their loans. They can have very creative and sometimes very aggressive remedies. For example, a federal bank can’t own shares in a borrower. But a private lender can take the assets or stock of a company as payment—it can own its borrowers. That has changed the nature of the market by a significant way,” he concluded.
The vast changes in the corporate debt market are many years in the making, reaching back to the dot-com bubble in 2000 and the recession of 2008. An abundance of money and new regulations coming out of the Great Recession lit the fuse of the private lending explosion.
“At the end of the dot-com bubble, there were fewer companies to invest in and we had lots of money looking for places to go,” Lewis said. “So these funds started looking for new ways to place their money and they discovered the advantages of corporate lending.
“Many of them prefer to lend money because they get higher status in the payout waterfall if it comes to default or bankruptcy,” he continued. “If they’re just equity investors, they’re last in line. Instead, their lending arrangements and lack of regulatory oversight give them broad rights to take over a company.
“Also, post-2008, federally chartered institutions were greatly restricted in how they could lend money and the supply dried up,” Lewis added. “And since loans are no longer viewed as stable long-term assets on their balance sheets, commercial banks are selling loans in the secondary debt market to investors of all different stripes. Some buyers are looking to arbitrage yields and some are anticipating buying the loan maybe as a vehicle to acquire the borrower.”
But while the lending landscape has expanded, the new environment has created significant challenges and opportunities for corporate managers looking for funding to finance or expand their operations. It has become clear that organizations need a broader awareness and understanding of how the debt market works.
“If you’re an officer in a company in need of money, you are at a disadvantage if you’re not cognizant of these changes,” Rizzuto said. “It’s maybe only the CEO and the CFO who are plugged into the debt market from corporate strategy standpoint.
“Apart from the current interest rate market, corporate managers need to understand who they’re borrowing from, what the restrictions are and what the terms are,” Rizzuto continued. “The current interest rate environment makes things more complex because much of the lending is being done at a variable rate. Given the rapid pace of rate increases and inflation, it’s tougher to manage that variable rate borrowing.
“It’s also critically important to understand what may happen if you fall out of compliance with a loan and what the options are for restructuring without losing control or ownership of the business. In the old, plain vanilla world of lending, these weren’t issues. They are now and it all happens very quickly,” Rizzuto added.
The three-day course Rizzuto and Lewis are teaching—Corporate Debt: Structuring, Managing and Thriving— is offered by Daniels Executive Education on three consecutive Wednesdays, September 14, 21 and 28, from 9 a.m.-4 p.m.
The course will outline successful strategies for borrowing money and managing debt as an organization. Participants will leave the class with the knowledge and tools needed to successfully use debt to finance the growth of their enterprise or to re-finance their existing debt.