• Strong lender relations are essential in LBO environments where leverage often exceeds six times EBITDA.
  • Despite this reality, the lender relationship is often neglected, as many CFOs view their lender solely as a counterparty.
  • A mismanaged relationship leads to harsh terms and little forgiveness, limiting a company’s growth potential.
  • Savvy portfolio company CFOs go beyond table stakes to elevate lender relations and forge a productive partnership.

A portfolio company’s controller may handle daily banking activities, but it is the CFO who manages the most important aspects of the lender relationship.

A survey from Vardis indicated only 26% of first-time PE-backed CFOs are operating with a similar level of debt as their previous role. PE-backed CFOs who adroitly navigate lender relations protect the health of their business and empower top-quartile performance.  

Best practices for an advantageous lender relationship include a deep knowledge of the loan agreement, a bedrock of credibility, and a firm grasp on what makes the banker successful.

Master the Loan Agreement

Loan agreements are complex documents that typically number no fewer than 150 pages.

The PE-backed CFO must know all reporting and covenant requirements along with all meaningful definitions. For example, what is the bank’s definition of adjusted EBITDA? Upwards of six pages in the agreement may be dedicated to defining this essential metric, and the CFO must comprehend these complexities.

Scrupulous knowledge of agreed covenants allows a CFO to steer clear of violations. It also enables them to send early warning to their lender if at risk of a tripped covenant.

Fearing poor financial performance will harm the banking relationship, CFOs often opt to disclose unfavorable results only when a violation appears inevitable. This destroys the lender’s trust and limits their options for a solution.

Stipulations around permitted acquisitions and additional borrowing are also of special concern in PE-backed environments. Sponsors expect CFOs to master these strateg...