E-mail not Synching properly on your Blackberry? Well, I Blame the Bankers.

By Sophie Papasavva, Partner at EMFC Loan Syndications LLP

Somewhere in the emerging markets, in a bank meeting room just like any other...

Banker:

“Fantastic business. We like it a lot. There is so much growth! Technology is everywhere. At our bank we see it as the ancillary to telecoms; it is the future and we are very eager to lend to technology companies. We even pride ourselves on being market leaders in this space. Pioneers in fact.”

CEO:

“Excellent! We are clearly in the right meeting room today!”

Banker:

“So, what exactly are your fixed assets?”

CEO:

“Well, there are some servers, but we do not have real fixed assets. We do not require a factory for what we produce...”

Banker:

“[laughs...] of course, of course. How about real estate or other property?”

CEO:

“None. There is no real estate or other property. You do understand that we are a young software company, right?”

Banker:

“Yes. Right. Of course. Software....”

CEO:

But we do have 3 years of revenues, more than 10 telcos as our contracted clients and report positive EBITDA.... otherwise we knew not to come here....

Banker:

“Yes, we do pride ourselves in our innovative approach to lending... However, without fixed security... [pause] .... I’m afraid we will require the shareholders’ private assets to back your personal guarantees. It’s the only way we’ll be able to lend to your company....”

CEO:

After the fourth identical conversation with yet another banker, is rightly wondering...

What ever happened to Cash is King?’

Being at the most conservative end of the finance community, bankers are expected to be cautious when it comes to lending out their precious funds to new borrowers. These days of course, caution even extends to long-standing relationships, at the dismay of CFOs. Unlike forward-looking equity investors with a ‘riskier’ outlook on life, bankers are backward looking. Show them three years of solid historic growth, audited accounts of course, positive EBITDA is a must, as are conservative debt / equity and low leverage ratios, experienced management (preferably with at least some grey hair), then there must be limited commercial risk, no political risk, etc. etc. The list of internal boxes to tick is endless. By the time a relationship banker gets comfortable with the prospect and even more frustratingly so, gets the credit officer comfortable with a deal, it may often have taken weeks if not months. And we haven’t even begun on tearing apart that model yet....

It is no surprise therefore, that mid-market or small corporates have limited chance of success with bankers, especially in the current economic environment of risk aversion; in several markets outside the US, technology companies stand no chance at all. Typically, with entrepreneurial backing, possibly one or two venture capitalists as shareholders, small and medium-sized technology companies do not have Chief Financial Officers, certainly not ones with grey hair and certainly not ones that speak ‘banker speak.’ At best, there may be a controller, treasurer or a finance director with an accounting background. At worst, it’s just another techie who drew the ‘managerial’ short straw.

Technology companies often start with one house bank where all bank accounts are kept and little is offered in return. To top it all off, they have no valuable fixed assets to offer as security. Accessing a working capital line to ease troughs and peaks and assist with cash management should be the first and simplest loan structure to come by - it will be short-term, should rely on contracted receivables and swept through a first charge account. Yet in most cases it is not easy. Even with valuable cash receivables as collateral, it is not. Even when such receivables come from 10 different blue-chip telecom operators, spread widely across a geographic region.... even then, it is not easy.

The question is why are relationship bankers not even trying to understand the needs of such businesses? If it is not their size (and not all banks aim for the multi-billion dollar deals), then it must be the service sector that technology sits firmly within. Perhaps one answer may be credit rationing, where bankers are unable (or perhaps unwilling) to make the distinction between riskier borrowers and less risky borrowers and therefore withdraw lending overall. Yet, smaller businesses are most likely to be the companies driven more so to succeed - senior management are often shareholders and are thus incentivised more directly than larger corporates.

Unlike larger, more established telecom operators with a long list of banking relationships, their (much smaller) technology partners are absolutely the most captive audience for lenders - and possibly for that reason, they get treated rather poorly by the banks. A small management team, likely with one or two employees in finance will not have the time or energy to shop around for a ‘better’ banking relationship to move their banking business to. They will not. Where growth is fast and resources limited, ‘shopping around’ is a highly resource-intensive luxury that is disruptive to day-to-day management of the business. That would be the privilege of enterprises with larger teams, with access to independent or public information, making them more knowledgeable and active in their respective remits. Large corporates make their banks compete for business, while smaller companies are ‘price and term’ takers. Yet again, volumes aside, smaller companies are probably better sources of ancillary business. One house bank gets all the transactional banking, the employee payroll, FX business, hedging, capital leases, overdraft etc etc. Here is an opportunity, even for the most reluctant of bankers, to grow revenues from a captive audience.

Also unlike the goliath-sized telcos, small technology firms are dynamic, innovative and efficient. In the two decades or so of mobile telephony on the planet, other than SMS, one struggles to find a Value Added Service that telecom operators have launched and monetised successfully. Telecom operators need partnerships with smaller technology firms, exactly because they innovate, because they adapt and because they can facilitate the deployment of go-to-market at light speeds compared to an in-house developed solution. More mature markets saw 3G networks licensed and built, sometimes at extraordinary cost; telecom operators praised each other and themselves in achieving a wondrous feat. And then they looked at each other wondering: ok, now what? Grateful as we all are to Steve Jobbs for showing them what to do with the pipe, let us not repeat the mistake in the emerging world. Telecom operators need partnerships with smaller technology firms, because the latter can help monetise the pipe quickly. Technology firms need funding to grow, innovate and expand into new markets. While there is a natural space for venture capitalists to play at the lower end, surely bankers want to take advantage of a huge and growing opportunity too?

Hands up who remembers the good old days of telecoms, when facility agreements included covenants for monthly management reporting with Key Performance Indicators? Subscriber numbers, churn, minimum ARPU levels, Subscriber Acquisition Costs, even bad debts were measured by the bankers. Security was the network equipment, shares and parent guarantees (many, themselves highly overleveraged). We all held hands together and jumped and what a wonderful journey it was for many. In the early days of telecoms, credit committees across North America and Western Europe consistently questioned the prospects of mobile telephony and subscriber uptake forecasts in the developed world, yet we lent.... Fast forward to today and mobile telephony has become such an integral part of all our societies and growth in the emerging markets especially, has exceeded all expectations. Now that we all helped secure funding to build those networks, why are we so reluctant to help monetise the use of those networks? In today’s world, why should service be less bankable than asset? Were banks ever really going to pull fibre out of the ground, or were they going to uproot and shift towers elsewhere? Besides, with the decline of voice ARPUs, if there is no data service going down that pipe, surely soon enough there will be very little value in that asset.

So how exactly does, the cloud, mobile TV, games, apps and other ancillaries differ from the above? Once again we have bankers questioning prospects, while exponential growth is bypassing telcos straight into the coffers of OTT players... So next time the mobile cannot access the latest football highlights, next time the Blackberry is not synching with Outlook, next time the smartphone is not depicting social network feeds correctly... Is it because the technology engine behind the telco is under-staffed, ill-equipped, working all hours of the night and day to deliver on a tight budget? Is it because the driving engine within the pipe is cash-strapped and in desperate need for some working capital to ease monthly fluctuations? Whilst we won’t have an answer, I know I’ll be blaming the bankers. Not all technology firms are bankable, but certainly there are many, many that should be. Next time the technology drops and quickly recovers, think, just for a moment, can we afford not to finance the innovators? Can we afford not to finance the entrepreneurs? Can we afford not to finance the service experts behind our telcos? I certainly think not.

Sophie Papasavva

Sophie Papasavva

Sophie Papasavva is the Founding Partner of EMFC Loan Syndications (“EMFC”), a boutique firm assisting companies seeking to raise bank debt. EMFC offers Loan Execution Support, acting as an additional ‘in-house’ resource to time-constrained finance teams. Prior to establishing EMFC, Sophie was a loans banker for 12 years, first as telecoms, media & technology relationship manager and later in loan syndications and sales, where she gained experience in multiple sectors such as oil & gas, mining, infrastructure, agribusiness and others. Sophie has originated, structured, executed, sold, restructured and syndicated loan financings ranging from simple bespoke bilaterals to complex multi-billion dollar, multi-currency syndicated transactions. Her expertise lies in arranging structured, bespoke financings for corporate borrowers operating in the emerging markets. To contact Sophie, please e-mail her directly at sophie@emfc-loans.com or follow her on Twitter at @Sophie_EMFC.