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Hampton Roads Association for Financial Professionals

December 14, 2010

Confidential – For Discussion & General Information Purposes Only

Borrowing 101

A high level overview of why companies borrow and how they go about it. Tips to help navigate where to turn, and what should be provided.

2Eastern VA Regional Commercial Banking

Wide variety – type, size, credit profile Public & Privately held Government, Institutional, Non-Profits, Banks... Start ups – early stage – emerging Established – growing Challenged – difficult times / cyclical, economic,

industry Event driven – ownership changes, mergers and

acquisitions, buyouts

Who borrows?


Why do companies borrow?

Short term needs General working capital Seasonal To fulfill large orders Dividends / distributions / taxes Liquidity

Long term needs Capital expenditures Technology equipment Plant / distribution machinery & equipment Real estate Research and development Expansion Liquidity


Capital Structure Basics: Debt vs. Equity

- Owners- Public / shareholders- Cooperatives – members- Angel- Mezzanine- Private Equity Groups

Investors

- Owners’ equity or members’ capital- Retained earnings- Mezzanine / Junior Capital- Subordinated Debt

Equity

Assets – Liabilities = Equity


Borrowings: Term, Tenor, Type

Secured vs. Unsecured

Collateralized / Cross-Collateralized

Structures- Revolving Lines of Credit

•364 day, 1 year, 2 year, 3 year, +•Borrowing base, non borrowing base

- Term loans•5-7 year

•Loan to values, advance rates, formulas

•Lease vs. Loan: obsolescence, tax impact, reporting

- Mortgages

•10, 15, 20 year amortizations, bullets

- Senior Notes / High Yields / Bonds

- IPOs / Secondary Offerings

- Tax Exempt Financing / Special Programs


Borrowings…

Guarantors- Affiliated companies, parent companies- Owners- Collateralized guarantees

Covenants- Liquidity: earnings or profits, CA/CL, cash or excess availability- Net worth: tangible net worth- Leverage: TL/NW, D/TNW, Sr Debt / EBITDA- Coverage: Interest, Fixed Charge Coverage


Time to Borrow: Starting Point

- Amount needed- Sources – collateral, cash flow, other- Uses – What will proceeds be used for, and over

what time period?- Financial statement condition- Business trends, outlook- Owner plans long term / strategy

Self Assessment


Time to Borrow: Where to Turn

Banks: local, regional, national, global

Commercial finance companies

Specialty lenders

Equipment finance providers

Factors

Asset based lenders

Purchase order finance providers

Investment bankers

Government backed programs / SBA


Time to Borrow: Where to Turn (continued)

Trusted advisors – CPAs, Attorneys, Bankers

Other companies – referrals / testimonials

Industry associations

Signs / Media

Internet


Be prepared: Questions Asked

Company structure

Ownership

Key management team

History

Locations / domestic, international

Operations: buys from, sells to, processes (sales, mfg, delivery)

Internal vs. external contributors

Contracts, Bids

Financial performance / trends / past and future

Competitors

Differentiation / Niche / Strengths

Weaknesses

Outlook / strategy


You may be asked to provide: - Financial statements: 3 years, 4 years, more

- Budgets or projections: 1 year or more, monthly/quarterly

- Tax Returns

- Personal financial statements: owners / principals

- Top customers

- Accounts Receivable

- Accounts Payable

- Inventory

- Machinery & Equipment

- Real estate / Locations

- Appraisals

Be Prepared: Information Requested


Be Prepared: Ongoing Reporting Requirements

You may be asked to provide ongoing:- Financial statements – monthly, quarterly, annually

- Financial statements preparation – compiled, reviewed, audited (firm utilized)

- Covenant compliance certificates - monthly, quarterly

- Borrowing base certificates - daily, weekly, monthly, quarterly

- Asset listings / verifications

- Collateral reports

- Field exams / collateral audits or appraisals


Be prepared: Questions to Ask

Fit / Match- Ability to address need- Culture, institution- Short term or long term solution

Solution Analysis - Is need provided for- What costs are involved- Can company continue to meet requirements: whether reporting,

management interaction, covenant compliance

Approval Process- Steps involved- Who approves: signatures or committee- Timing

Closing Process / Funding- Documentation- Appraisals, Other- Timing

Western Mid-Atlantic Commercial Banking 14

Questions & Answers

Susan L. MillerVice President, Regional Business Development

804-697-6748 Office / 770-235-4488 [email protected]

Wells Fargo Bank, N.A.Eastern VA Regional Commercial Banking Office

440 Monticello Avenue, 11th FloorNorfolk, VA 23510-2372