Common & Deadly Financing Mistakes

Common & Deadly Financing Mistakes

Banking Concentration Risk

Most business people understand the risks associated having only one customer or supplier. Unfortunately when the GFC turned the market against the property development industry, Banks also turned against their developer clients.
The worst affected developers were those who had all of their sources of liquidity and debt with the one supplier who also happens to be able to take control of your business. We help our clients to strategically manage their banking relationships to reduce the control of there Banker/s and better empower our clients to make their own decisions as conditions change.
What would happen to you if your one and only Bank would not renew your facilities, increases the covenants of facilities, locked up your cash, demanded immediate debt reduction, ordered a sudden revaluation of your property, uniformly increased your pricing, would not support any more borrowing, applied your surplus cash flow to debt reduction, would not release surplus development proceeds even after debt reduction applied a default interest rate, forced you to sell down your assets in a depressed market to reduce debt, would not pay a valid variation to your build contract and your builder is about to walk off the job and lock up the site as a result then takes legal action against you?
Maybe you have already experienced this already, what now, what then, what can you do about it, what are your rights, what’s your plan?

Making an assumption that all “Banks” are the same

There are many factors that affect a lender’s appetite, competitiveness, pricing, lending guidelines and flexibility….to name a few:

  • Skill, knowledge, experience, attitude, support, seniority and professional standing of the individual Bankers who you are dealing with.
  • Size of the loan
  • “Balance Sheet Pressure” declining profitability due to a loss of market share and loans running off there book faster than they are replacing them
  • Lender’s overall liquidity and funding structure ie how many deposits vs loans do they have
  • Lenders cost of funds
  • Concentration by property sector, location and loan sizes
  • An increase or decrease in Bad and Doubtful to developers in specific sectors
  • The overall concentration of development loans on there book
  • Attractiveness of relative net interest margins and fees
  • Banking Cycle & Property Cycle & Book Weighting
  • Changes in the leadership and management structure of sales
  • Overall competition

The directors of DPF have held senior banking roles so we understand the significant effect any of these factors can have on any lender. Part of our job is staying informed on each of these factors and being able to forecast and strategically manage the risks and take advantage of the opportunities that change inevitably brings with it.
Do you know where your Bank is at?

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