The Target of a Tender Process

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We see a lot of advertisements around mentioning don’t pay the banks too much “loyalty tax” i.e. another way of saying – Let’s find the cheapest interest rate. Commercial and corporate lending facilities are not home loans; sometimes cheaper isn’t always better.

When we are engaged by clients to tender their banking arrangements and/or market scope terms for acquisition; it is easy to be drawn to “what is the cheapest rate you can get me”.

Whilst no one loves paying an absurd amount of loyalty tax to their financier, sometimes there is a lot more to pull apart in a debt structure than just an interest rate. The most critical question we ask a client is:

What are they trying to target as part of this tender process? Is the target objective simply the cheapest possible all-up interest rate under any circumstances, or are you trying to find that sweet spot between rate and overall terms?

We feel targeting the interest rate as a standalone objective for a tender of debt facilities, especially in the +$10M debt space, is fraught with danger. Anyone can go to the market and conduct a race to the bottom on an interest rate. When appointing Nexus Capital Partners as debt and capital advisors, we review full terms beyond just the rate and advise clients on non-monetary factors such as:

  • Covenants and conditions – Have these been stress tested? Does the business have the finance function and resources to potentially report quarterly/half-yearly to a bank? Does the client understand the implications of a covenant breach?
  • Loan Structure- Does this amazing cheap rate mean a full review is required in 2 years or is the rate for a loan term of say 5 years? Does the client value loan tenure? Does the client understand the review process and what is required from the financer? A cheap rate may mean a certain risk profile needs to be maintained, has this been stress tested?
  • Growth– If the client is on rapid growth, are they aware of the cheapest rates bank’s appetite to grow with them? Are there precedent transactions in the market illustrating that the financier is comfortable to grow in the client’s sector beyond the current offer? Does the financier offer facilities to support growth down the track i.e bespoke working capital lines?

Of course, the interest rate is important, and a difference of 100bps on a $10M facility is $100k in “loyalty tax” each year. A lot of clients ask themselves, how many more widgets do I need to sell to a net profit of $100k? The answer is often A LOT. However, it is important to engage the right people, who acutely understand the entire picture, to run a tender process and advise clients accordingly. Not simply pat each other on the back because they saved a client 0.25% on their borrowings when 12 months down the track uncover aspects of the facility they weren’t fully aware of because they focused solely on the rate when accepting the loan offer.