Money
Issue No. 15 - February/March 2004
Devil in the Bank Lending Detail
by Mark Day
Certainly a big part of our advisory role is to ensure that companies get a fair deal from bankers. Generally this manifests itself in bank pricing. However, there is another side to banking which is all too often left unattended – the ‘nitty gritty’ of the bank offer.
The Letter of Offer, or ‘Terms Sheet’ as it is sometimes referred to, can be a bit of a beast. Unless the terms of the bank dealing with a company have been set out in detail in a Request For Proposal/Tender, the Letter of Offer is usually heavily skewed to terms under which the lender wants to do business. However, as with most legal agreements there are parts of the Letter of Offer that can, and should, be negotiated.
Know Your Benchmarks
Benchmarks are everything. The Benchmarks (which may manifest themselves as Service Level Agreements – SLAs) provide the foundation of a good banking agreement and there are two treasury benchmarks that are typically overlooked in the initial funding offer.
1. The benchmark upon which the bank bills (or a floating rate advance) roll at.
2. The benchmark upon which a fixed rate agreement will be struck and unwound (if applicable).
Most banks make an ongoing fortune through their client’s ignorance of the above and there is many a company that has considered that it has struck an aggressive borrowing deal only to discover at a later time that its bank is rolling its bank bills above the benchmark. One example I came across was where a company had negotiated (and was chuffed about) a 1% all—up lending margin. Some time later, we were asked to provide some general banking advice and whilst doing our work discovered that this bank was rolling their bank bills at 0.6% over the benchmark. On bills outstanding of $10,000,000 this was costing the company $60,000 per annum in hidden bank fees!
There is only one variable rate benchmark that domestic borrowers need to worry about and it is the BBSW Offer Ra...
