Strategies for improving credit access: A study by the FEI research foundation finds that credit is once again the key product that companies seek from banks - but that its often subject to tough scrutiny.

• Author: Graziano, Cheryl de Mesa
• Position: Financing

Credit access and availability have become key priorities as banks continue to tighten credit reins in today's uncertain economic environment.

As credit agencies begin to focus on potential downgrades, credit is reemerging as the power center of banking. A recent FEI Research Foundation study, Access to Credit: How Corporations Are Changing Strategies to Ensure Growth and Sustain Liquidity in Good Times and Bad, provides insight into dealing with current market trends and improving access to credit. (A related article, "Tough Times and Tougher Banks," appears on page 21.)

Based on discussions with executives from several prominent corporations, author Frederick C. Militello Jr. reports that that risk-adjusted return on capital (RAROC) requirements are the key drivers when banks determine if a company is granted credit. "Companies must be prepared to illustrate how they provide an adequate return on the total portfolio of business opportunities they bring to the relationship," Militello states.

Negotiation for adequate credit is further complicated during times of economic contraction when companies must still provide their bankers sufficient fee - based income and deal flow. As a result, bankers are making company assessments with greater scrutiny and seeking added protection.

"Doing business with banks -- in terms of gaining access to credit -- was becoming more difficult," notes Tod Christie, Treasurer of Sealed Air Corp. "A quid pro quo attitude was clearly becoming evident, and we just couldn't be sure that we could continue generating the deal flow necessary to keep each of them [bankers] sufficiently satisfied." Indeed, most of the companies participating in the study have experienced noticeable changes in negotiation of debt maturities and loan covenants in recent months.

In addition to more restrictive covenants and increasing credit spreads, Militello observes that banks are obtaining greater flexibility in the ability to enter into loan sales and participations. Furthermore, companies that might normally oppose loan syndication are agreeing to the bankers' conditions in the hopes the terms will either not be exercised or will be done in close consultation with their bankers.

With bank capital allocated under the more disciplined RAROC approach, company bank groups get smaller, the study says. "Specifically, if companies are going to get the credit access they need, then they must be important customers to their banks -- a trend...