Prior to 1990, most developing firms obtained term loans from banks and insurance companies, but there was a "flight to quality" in 1990 where insurance companies and banks reduced lending. Today, insurance companies and banks have much smaller portions of their portfolios in below-investment-grade loans. While banks prefer short-term assets and liabilities, insurance companies match long-term assets with long-term loans. When negotiating loans, borrowers should consider their earnings history, asset types, and liquidation value to strengthen their bargaining position, while also allowing management flexibility to avoid default.

2.  Prior to 1990, most developing firms would
get their term loans(intermediate term
financing) from their bank or insurance
company. But in that year, there was a
“flight to quality” by the insurance
companies and banks.
 Prior to 1990, life companies had about 20%
of their portfolio of loans to “BIG” (below
investment grade) companies; today it is a
few percent.
 Today its “junk bond fund”

3.  Banks like to match short term liabilities
with short term assets; insurance companies
like to match their long term assets with long
term loans. If banks make a fixed rate loan
they can “swap” it for a floating rate.

4.  Bank loans were usually for less than a year.
Term loans (50%) privately placed were to
seven to fifteen years. 705 of bonds were
over ten years to maturity.
 With small loans collateral is very important.
As the size of the loan is increases, and the
“information problem” decrease, collateral
becomes less important. Then cash flow
takes over.
 Bonds are virtually all uncollateralized.

5.  Aswe got away from the “credit crunch” of
1990-1991, the yields of all bonds dropped.
 today we are blessed with an abundance of
debt money available and at lower rates than
in the past.

6.  Despitethe availability of money it is still
necessary to negotiate a loan.
 This mean that it is incumbent on a borrower
to be as up on the process as possible.
 Ifnothing else, having a “negotiating
strategy” will impress the lender with your
management acumen.

7.  Affirmative covenants & representations and
warranties.
-stay in the same business
-submit periodic financial statements
♦of certain type
-proper insurance coverage
♦on certain executive(s)
-pay taxes
-top management stay in place.

8.  FORGE YOUR OWN STRATEGY
♦consider your earnings history, losses make
you a risk.
♦considering types of assets company own,
Networking capital level, and margin of safety
for creditors, could bank get repaid if
company’s assets will liquidated? If yes, then
you have a strong balance sheet.

9. A BASIC NEGOTIATING POSTURE
♦management needs flexibility to avoid
default.
♦even if some restriction is dropped, banks will
still achieve objectives with remaining
covenants.
♦strong balance sheet indicates good
secondary source of repayment if income
streams declines.
♦banker can tolerate large payouts or other
actions because it can full the “trigger” if need
be.