How to talk to lenders

Hi All,

Was digging through the forum archives and haven't found anything good about how to talk to lenders from a PE perspective. I was wondering for those who have had a decent amount of time in the diligence process, what are some tips / tricks you use when speaking through an investment and negotiating terms with lenders (Oaktree, Ares, Varagon etc). What are some pittfalls that you don't talk about when presenting the deal / answering diligence questions to them?

Thanks in advance!

Comments (13)

Nov 3, 2019 - 11:15pm

Depends on your relationship with them but show them the path to being made whole with low risk, explain why your interests are aligned, cite precedent terms you've had with other lender in the past.

For pitfalls lenders hate concentrated risk (as you likely do as an equity investor as well). Position around customer / supplier concentration, regulatory landscape etc. Ultimately, if they ask for something that you have or is available you should probably provide it. Long term in this industry you won't get far by screwing over lenders consistently (unless you're Donald Trump I guess)

Nov 15, 2019 - 6:23pm

Totally makes sense from an investment perspective.

Perhaps I should have phrased my question better - I was almost looking more to what I should avoid. I.e. not disclosing purchase price multiple as they may lower their leverage read (if initially they priced higher), thoughts on competitors etc. Also nuances such as asking them if they have any other trees in their group to get more information about how competitive the deal is etc.

Although I have the basics, I'm always a bit afraid I'm letting out too much information that will later haunt me in the process.

Nov 15, 2019 - 7:45pm

I work for a credit fund, so from my perspective, the poster above is right. If you're withholding information that's likely to cause someone to re-think their leverage read, it's something that's either going to come out through the diligence process and may result in a re-trade closer to close or come out post-close and you'll have a lender that may not be happy with the credit. Either result isn't great. This is a repeat business, and the groups we'll stretch on leverage and terms for are the ones that we know are being upfront with us about the risks of the deal and notable transaction dynamics.

The corollary to that and the advice I'd give is to think through the questions we're likely to ask and have solid answers. To use the examples above, if there's significant customer concentration, why isn't that customer going to leave? If there's regulatory risk, what work have you done to indicate that the worst case scenario won't happen or the company is ready to shift with changing regulation?

YMMV as we're very relationship focused, and there's enough lenders out there now that you can keep pushing groups around, but seems like a tough was to do business IMO.

Nov 15, 2019 - 7:52pm

Obviously it seems as though you have some of the basics ex. by no means should you ask them how many trees they have the deal in from, just shows poorly as a firm / disrespectful. You want to be cognizant that they want to be a partner with you in a transaction not just a lender, so speak to them about what they want to hear aka answering their diligence questions, update them on process, invite them to dial-in or attend MP's. It's probably a good idea to avoid disclosing purchase price earlier in the stage but be cognizant that most private credit shops have a minimum 35-40% equity cap. Lenders appreciate when you are transparent with them aka telling them I've talked to a few financing parties who are leaning towards 5.00-5.50x rather than 4.50x leverage read you provided. Those are just a few examples.

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