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After PPP Ends, Don’t Overlook This Important Fourth “P”

By HD Jacobs, Senior Depository and Lending Solutions Product Specialist at S&P Global Market Intelligence, and Susan Bell Co-Founder and EVP of Sales at Vertical IQ

woman at laptop preparedness call preparationThe Paycheck Protection Program (PPP) was like a safe harbor in a terrible and unexpected storm for many small businesses this past year. Indeed, thousands of businesses that would have otherwise gone under during the COVID-19 pandemic were able to stay afloat thanks to PPP funds.

The program also created a lot of unforeseen work for business bankers as they consulted with clients who needed assistance to tap into the program’s funds. Now, as PPP draws to a close at the end of May, banks and bankers may need to shift into a different gear.

This is where a new “P” comes into play: Preparedness. Preparedness can take several forms post-PPP as bankers seek to help both new and existing clients thrive.

Prepare to find new business

For some bankers, preparedness may involve going after brand-new clients. Their book of business may have shifted seismically amid the pandemic, with some companies thriving while others barely survived or even closed-up shop. As a result, banks and bankers must assess which industries will best balance out their portfolios and target prospects within those niches.

In order to do this, bankers first need to prepare by getting up to speed using Industry Intelligence. They must understand the potential risks facing certain industries, which could in turn impact the bank’s bottom line, as well as opportunities for growth within particular verticals. They also need to know how their targeted industries operate and the latest trends in order to be prepared to have a tailored conversation with prospects.

Next, bankers need to know specifically who within the prospective industry they should target. Which companies in the banker’s footprint are operating within the space? And who should they contact in order to initiate that industry-focused conversation? This is where Market Intelligence comes into play.

Prepare to nurture existing clients

For other bankers, preparedness could mean deepening existing client relationships through advisory conversations.

Maybe the client is new to the bank since the start of the pandemic and their banker has not had an opportunity to really get engaged with them and their business. Or perhaps they only had a small loan with the bank prior to the pandemic, but now new prosperity and opportunities have arisen. Either way, this is an opportunity to tap into both Market and Industry Intelligence.

Using Market Intelligence, the banker can ascertain what portion of the client’s banking relationship is with your bank…and what other potential business may still be on the table to deepen the relationship. For example, do they have a commercial mortgage with another bank? What’s their interest rate? Would a refi at a lower rate be an opportunity to capture more of the client’s business?

Nurturing existing clients also means getting (and staying) up to speed on the ins and outs of their niche using Industry Intelligence: how they operate, the current trends, potential risks, and more. This enables bankers to have industry-focused discussions (not generic) — conversations that truly add value to the relationship from the client’s perspective.

Super-sleuthing to preparedness

In the post-PPP world, the fourth “P” — preparedness — involves using your resources to develop new business, engage with newer clients, and deepen relationships with existing clients. It might sound a bit overwhelming, but all of this can be accomplished with a little  “super-sleuthing.” And the integration of Vertical IQ’s Industry Intelligence with the Market Intelligence on S&P Global Market Intelligence makes it simple.

For instance, use S&P Global Market Intelligence to find in-depth property and mortgage data for 25 million CRE properties, with 15 million business listings (90+ percent of U.S. CRE market coverage). You’ll also find monthly updates of new, amended, and terminated C&I lien and UCC filing activity. This can help you determine if a client or prospect has lending opportunities up for grabs. You also can use S&P Global’s robust search function to target specific businesses in a geographic area and identify decision-makers (including their contact information).

Continue your super-sleuthing on that company’s industry by linking to the Vertical IQ Call Prep Sheet or full Industry Profile directly from the S&P Global database. There, you’ll find the Industry Intelligence you need in order to understand the inner-workings of that client or prospect’s business. You’ll even find tailored Call Prep Questions to get your conversation started and shareable news articles to use as a value-added leave-behind.

Vertical IQ’s Industry Intelligence and S&P Global’s Market Intelligence really do go together like peas and carrots when it comes to the post-PPP fourth “P”: preparedness. Get started today by requesting a demo of S&P Global Market Intelligence and/or Vertical IQ!

>> Related: S&P Global Market Intelligence and Vertical IQ Announce Strategic Collaboration to Support U.S. Financial Institutions

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Swap: Potential Benefits and Downsides to the Bank and Borrower


Guest post by David Nicholson, Owner of Credit Training Inc.

swap, banker meeting with clients pexels-august-de-richelieuFor commercial bankers, a large part of being a value added advisor is understanding the unique challenges faced by others within your client’s or prospect’s industry and offering solutions to those problems. Vertical IQ can help you learn about the types of risks associated with a particular industry so that you can share those insights with your client in an articulate manner. 

But when it comes to the complexities of certain banking products and services, it can be difficult to explain all of the intricacies to a business owner when you don’t fully understand them yourself. 

In this guest blog post by credit expert David Nicholson, he explains the ins and outs of a credit swap. Could this be a useful pricing option for a business owner you know?

The Swap Challenge

Yes, a swap is fairly complicated for sure. Most commercial bankers shy away from swap options for clients as too complicated. But like any complicated item or concept, being able to understand the primary moving parts before tripping up on the details makes a big difference for the bank, the borrower, and the lender. In this blog, I have simplified the moving parts so both bank and borrower can understand. From there, an informed conversation can be had and an informed decision can be made.

For over 20 years, the banking world has been using swaps as a pricing option for clients, and there are definitely nice benefits for both banks and borrowers. What I have found is that there are some people who can talk about certain aspects of swaps, but not as many can talk about it in a way that is understandable and clearly lays out the benefits, and equally as important, the potential downside of swaps for both the bank and the borrower.

It is in this understanding that a commercial banker can inform (not sell) a client about swaps. As a result, when a borrower is well-informed, they are able to make the decision on a swap option.

As a side note: Why is it important for the borrower to get the right information and make a decision and not have the bank’s commercial lender “pushing” swaps? This is because of “lender liability.” Lender liability is a blog in itself. However, when referencing swaps, lender liability is possible if a lender persuades a borrower into a swap without the borrower fully knowing the potential downside to the swap.

As will be stated later in this blog post, the bank does get a large swap fee, which typically equates to about 2% of the notional amount (loan amount being swapped). So there is significant bank incentive to close swaps. This fee connection can lead banks and lenders to the perception of “pushing” swaps onto clients, which relates to the previously mentioned lender liability.

The History of Swaps

When swaps started to become a mainstream pricing option in the late ‘90s, rates were much higher than today. As one of the potential downsides to the borrower, when rates decrease after the swap-related loan closes, the borrower would be “out of the money” (OTM), which also will be discussed later in this post.

It is this OTM effect that had many borrowers upset in the 2000s when rates were decreasing through to 2008 at which time rates hit relative historical lows. This OTM position is in part what led to parts of the Dodd Frank Act, specifically as it relates to derivatives.

The Dodd Frank Act restricted “smaller” borrowers from having access to a swap, as it may have been thought that smaller borrowers are less sophisticated and less able to understand the swap. So in an effort to shield smaller borrowers from the potential downside of a swap, they were restricted from access to the benefits of a swap.

Looking Under the Hood of the Swap

I have been to a number of swap training seminars and classes over the years. While they did provide the mechanics of how the rates between involved parties work, there has always been a “scratching of the head” on the big picture of why a bank and borrower would want a swap-based pricing option.

In a way, equating it to a computer can help visualize this point. I know the benefits and downsides of having a computer. I know it can make my work much more efficient and organized. I also know it will cost me a good amount of money; there can be risk of identity theft; etc. With that information, I can make an informed decision that the benefits outweigh the cost. So I buy the computer. Keep in mind, I do not know how the electronics under the keyboard work. That is complicated. As a user, in a sense, it just works. Working with swaps for 20 years, I can say how the swap works between the lender, the borrower, and the counterparty — that it just works. The details of how it works would be for another blog.

Most all conversations between the lender and the bank and the lender and the borrower are within the benefits and potential downside to the bank and borrower, which is why this blog stays within this framework of benefits and potential downside to the bank and borrower.

Before discussing the behind the scenes workings of a swap (the equivalent of my example of how a computer works), it is important to understand why we are even talking about swaps. Why would a bank and a borrower even be interested in a swap? This gets us to the benefits of a swap to the bank and borrower. Equally as important are the potential downsides.

Benefits to the Borrower

Longer rate lock period

One of the primary benefits to the borrower is the fact that they can have a rate lock for fixed rate loans longer than the typical 5 years. The client can have a rate lock for as long as the amortization period is. This is an important point especially in such a low-rate environment as borrowers tend to ask for longer rate locks on traditional priced loans to hedge against the potential for rising interest rate. Borrowers like to go out 7 and 10 years if possible while banks do not.  With a swap, the bank is fine with the rate lock periods in excess of 5 years.

Potential for “in the money”

With rates at all-time lows, if any time is a good time for a swap, it is now. If rates go up after the swap loan is closed, then the client is “in the money.”  While this “in the money” and “out of the money” figure is a number that can be figured out at any time in the life of the swap, it only impacts the company financially if the swap is terminated within the swap period. So if a swap closed with a 7-year fixed rate to the borrower of 4.75%, and the swap was terminated after 3 years when rates increased to 6.25%, the borrower would get a check. Importantly, a prepayment penalty is different.

My prior comment that a low-rate environment is the most optimal time for a swap is identified here because when rates are at all-time lows (like they are currently), the likelihood that rates might increase rather than decrease seems higher. This is the point where lender liability can come into play. We should state facts as a lender, not state that it is more likely that rates will go up. For example, anyone who thought rates would go up in the last 12 years as our national debt has increased significantly would have been wrong.

With that said, as a lender, I always liked when my borrowers did well. As such, it is my opinion that offering swaps in such a low-rate environment does have more likelihood of an upside for the client than a downside as it relates to rate movement. However, to avoid lender liability, stating the facts and letting the borrower decide if they want to engage in a swap avoids the stated lender liability.

The fixed swap rate for the borrower is typically a lower rate than the traditional equivalent

The liquidity of these derivative instruments through the trading on the secondary market via legal contracts allows for a borrower fixed swap rate that is often around 0.5% less than the traditional equivalent.

Option for the borrower to roll in closing costs

Through the pricing process with the bank’s swap desk, rolling closing costs into the rate is a nice option. For example, when pricing a loan, if Bank A has $15,000 of closing costs that the borrower pays, this $15,000 can be rolled into the interest rate. Although it will vary depending on certain factors, one of which is the amount of the closing costs, I have typically found it falling into the range of 6-8 basis points increase in the rate to cover the closing costs.

The takeaway of this benefit to the borrower is that an all-in swap rate inclusive of rolling in closing costs is typically around 42 basis points less than the traditional equivalent.

Of note: The borrower pays the closing costs at the time of closing and then gets reimbursed approximately three business days after.

Downside to the Borrower

Potential for “out of the money”

As great as it can be for your client to be “in the money” if interest rates go up, it is equally as important to discuss with the borrower the impact of being “out of the money” if rates go down.

It is important to remember that scenarios for “in the money” and “out of the money” are easy for your swap desk to calculate at any point and prior to the swap closing based on projected interest rate scenarios at different projected points in time throughout the life of the swap. It is a good exercise to go through with the client or prospect so they get a feel for the upside and downside potentials.

The client should be fully aware that the swap derivative product is a contract with definitive terms and conditions. There is no negotiating with the bank after the swap is executed. Unlike a prepayment penalty, which many times can be renegotiated or waived, the terms and conditions of the swap cannot be.

Benefit to the Bank

Large swap fee income

This benefit can be substantial, and the fee is able to be recorded on the bank’s income statement the day the swap is executed. Typically, the swap fee is approximately 2% of the notional amount of the loan. Not too many bank-related loan facilities generate that kind of fee income. It can be a significant incentive to have swap fee income as a part of the commercial lender or business development officer’s goals.

I have heard a number of times that the swap fee is a one-time fee and not recurring. That is true, however, if each lender closes on two to three swaps per year, then the swap fee income has a recurring nature to it and can be significant.

It is important to note that this type of goal can create issues related to lender liability where a lender may be “pushing” or “leading” a borrower down the path of a swap. How this happens can be through emphasizing the benefits of a swap while not mentioning or misleading the borrower as to the potential downside to a swap. This is why informing the borrower of the benefits and the downside of a swap is very important. Letting the borrower decide what option is right for them is a good way to reduce lender liability risk.

A typical question that is asked is who pays the fee. Initially, the borrower pays at closing and then is reimbursed a few business days later. Ultimately, the fee is paid through the ticking up of the rate to the borrower.

It is common for the net loan fixed interest rate to the borrower to include 25 basis points. This basis point number is a variable in determining the actual swap fee income for the bank. The higher that number of basis points, the higher the swap fee. Bottom line: The swap fee is paid through the interest rate.

Keep in mind that although the bank does get this robust swap fee income, they also get a lower floating rate than they typically would with traditional pricing (mentioned later in this blog post). This takes us to the next benefit, which also has a negative tied to it.

Bank hedge against interest rate risk with a floating rate

If you have ever been to an ALCO meeting at a bank, you understand very quickly that banks look to hedge a portion of their loan portfolios against interest rate risk. One way to do that is to have floating rate loans. The swap provides a floating rate loan for the bank while, as we discussed, the borrower gets a fixed rate loan. Yes, both sides get what they are looking for

As previously stated, the floating rate is typically priced lower than the bank typically likes their floating rates to be. Remember, this floating rate is tied to 30-day LIBOR, which is currently 12 basis points. This brings us to the next topic, which relates to the downside to the bank.

Downside to the Bank

The floating rate for the bank is typically lower than the traditional equivalent

It is important to note that the swap rate is derived using the 30-day LIBOR rate. As of 3/1/21, the 30-day LIBOR rate is 12 basis points, or 0.12%. From there, the bank adds a spread, a swap fee embedded into the rate and possibly a tick up in the rate to cover closing costs.

As you can see, while the bank does enjoy a hedge against interest rate risk, the rate is more compressed than a bank typically likes. Remember, this is partially offset by the one-time swap fee, which typically is about 2% of the notional amount of the loan facility being swapped.

Credit risk exposure: Collateralize this risk…

The default thinking for a commercial banker is that all loans need to be collateralized, or at least almost always. As with the loan, the credit risk exposure related to the swap needs to be collateralized.

The “out of the money” is not only a risk to the borrower, but very importantly, it is a risk to the bank. The reason is because if the borrower does not or is not able to pay this swap breakage fee, if incurred, then the bank is responsible for the obligation to the counterparty. This is why, during the approval process, banks should run the potential risk calculation and then collateralize this amount along with the traditional loan facility or facilities collateral coverage.

An excellent way to help manage the credit risk exposure related to a swap is to use a legal firm that is savvy in this type of commercial banking legal work. Most all commercial deals use legal firms for closing documents, so using a legal firm capable in this aspect of commercial banking is highly recommended.

Conclusion

There are upsides and downsides to a swap for the bank and the borrower. If your bank is offering swaps to your clients, the key is to understand the upside and downside potential to both the bank and the borrower. This allows for informed banks and informed borrowers. That is the goal for banks: to have lenders who are informed and able to provide real value to clients so they can make informed decisions as to what is best for their company. As a result, a better bank/borrower relationship means everyone wins. What’s better than that?

 

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S&P Global Integrates Vertical IQ Industry Data to Help Lenders Better Understand Customers

By Guest Blogger Cam Saucier, Product Manager, U.S. Financial Institutions at S&P Global Market Intelligence

businessman hunters-race-unsplashThe COVID-19 pandemic ravaged U.S. small businesses and their owners. The lenders who serve them were also challenged in ways not seen since the Great Recession.  

In April 2020, bankers had to navigate a new $522 billion government loan program with limited guidance, while also employing stricter underwriting standards. 

Those who persevered found success in a basic banking principle: To connect best with customers, you need to understand their unique circumstances. These lenders understood not just the general economic hardships faced by U.S. small businesses, but their industry-specific challenges.

Market Intelligence recently announced a strategic collaboration with Vertical IQ. This collaboration will help clients find valuable prospecting opportunities with our Commercial Prospecting solution and improve their outreach outcomes with Vertical IQ’s Industry Intelligence. 

We are thrilled to be working with Vertical IQ and leveraging their unique expertise with industry insight and local/regional business economies,” said Jimmy Pittenger, Senior Director of Financial Institutions at S&P Global Market Intelligence.

Combining business data with industry insights

The Commercial Prospecting solution, one of Market Intelligence’s primary products for U.S. commercial banks, helps lenders discover new commercial real estate (CRE) or commercial & industrial (C&I) lending opportunities. Commercial Prospecting combines the power of three data sets:

  • >> 25 million+ U.S. commercial properties and loan records
  • >> 15 million+ mostly private U.S. business listings
  • >> 70 million+ UCC filings in the majority of U.S. states

By matching these data sets together, we show not only commercial mortgage or lien records, but detailed demographic information about the obligors, which facilitates outreach. 

This solution excels at helping lenders find lending opportunities within their centers of influence. Until now, however, the product couldn’t provide detailed insights about small business industries. 

With the addition of Vertical IQ Industry Intelligence to Market Intelligence’s prospecting reports, clients can now access detailed insights about small business industries. These insights can simplify a lender’s rapport-building process with customers. We’ve matched over 75% of S&P Global’s 15 million business listings to Vertical IQ’s industry reports, according to our internal analysis.  

Through single-sign-on (SSO), we’ve created a seamless workflow for Market Intelligence clients to navigate between the Market Intelligence platform and Vertical IQ. Lenders can view industry reports associated with business or mortgage opportunities without having to constantly sign into different platforms. 

The entire solution is housed within Market Intelligence’s Screener application, a powerful filter that helps users search for data. The application has a save feature for search criteria and an export button for users that want to save Vertical IQ report links in Excel.  

Forming a strategic collaboration 

From the inception, both companies saw the mutual benefits of working together. Market Intelligence was lacking the deep industry data found in Vertical IQ’s industry reports and our clients were interested in more robust data. The strategic collaboration with Vertical IQ was a quick and efficient way to bring value to these clients within a short development cycle.

In 2021, Market Intelligence will be looking for additional ways to showcase Vertical IQ data and expand our strategic collaboration. When it comes to industry data, you can never have enough.

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