Five Ways Middle Market CFOs Can Make Sound Financial Decisions | Bill Fink, EVP & Head U.S. Middle Market Banking, TD Bank

Bill Fink:
So today, a rate, a comparable market rate, whether you’re looking at LIBOR or SOFR would be about 4%. And for those who follow those two benchmarks, you’re looking at a margin over LIBOR or SOFR on a 30-day basis something in the area of 240 to 250 basis points. And so if you start there, you look at a $1 million loan at 4% for 60 months, you would have an $18,400 payment per month. And the interest cost over 12 months, the first 12, or the life of the loan, pardon me, would be $104,000. If rates go up from where they are today, 150 basis points, your 4% rate goes to 5.5 and the total interest cost over the life of the loan moves from $104,900 to $146,000. So you can see the difference is over $40,000.

In that case, it may be enough to refinance, particularly if it’s a five-year loan. When you get out to seven and 10 years, which is kind of the upper limit for capital equipment, and if you have owner-occupied real estate to operate the business out of, it begins to make better sense as you go out on the curve. So I wish there was one simple answer, but you got to put pen to paper and begin to do the math and determine whether it makes sense or not. But I would expect as rates continue to go, and if the interest rate increase from where we are today by the fed potentially moves out beyond 200 basis points, if that’s the new time horizon and the new differential, it may make very good sense to consider refinancing.

CFOTL:
Well, the second item you had was be mindful of the expected yields. Now, you made that number two. I was curious, what is he trying to say about mid-market businesses? I mean, they don’t have their eye on the ball always? What are you suggesting here?

Bill Fink:
Well, I would say we talked about the loan side, so be mindful of expected yields on the loan side. And people, really CFOs, who are on top of their game and most are, really look at the debt side because debt is proportionately often a significant part of their balance sheet and managing that expense. So that’s the easy one. And because it’s so focal, I often say to people, don’t lose sight of what you’re doing with your idle cash. And so if you’re not going to invest your working capital in your excess liquidity, which is a safety cushion, you’re not going to invest that long term. So being mindful of what’s happening with yields, and as we saw just from March the feds moved 150 basis points, that has not fully translated into 150 basis points in deposit rates. It’s been something less, but as we continue to have an upward trend in fed funds rate, that will translate.

So this is the perfect opportunity not only to look at the rate, but look at where are you putting your excess liquidity and your excess working capital? Look at the mix of products on a short term basis. If you’re in bank funds, you can look at money market mutual funds, you can look at repos, you can look at some combination of all of them to get the maximum return on that idle cash to bring return to the company. Because there’s nothing worse, the least productive asset is idle cash. So you need to be sure as the opportunity presents you’re maximizing that return.

CFOTL:
Your next item I thought was interesting just because finance leaders, the mantra is to be looking forward and they’re forecasting and re-forecasting. And they’re doing scenario planning, trying to understand what the future might bring, but you’re telling them no, no, no, you got to look backwards, too. Learn from the past. Do I have that right? And interestingly, they’re not always very good at this. What are you sharing here, however?

Bill Fink:
Well, I look at it, Jack, from this standpoint is look in the past, learn from the past, and use that as a tool for the future as you continue to look at your business, you continue to look at opportunities. And the reason why I say that is I have had clients from 2001, 2002, during that recession, during the Great Recession, and what I have found is people who are mindful of opportunity. And that’s what happened in the last two recessions is that there were opportunities to do both on acquisitions, to do divestitures, to strategic reposition the business, to take advantage of where others in a competitive frame of reference may not be as aggressive. And you look to reposition the business potentially into new markets, deep in existing markets or divest again businesses that don’t have a long-term strategic fit.

And many people hunker down as times become more uncertain. And we’re clearly in uncertain times with any number of factors driving that uncertainty from supply chain issues to increasing interest rates to the war in Ukraine to port issues in Asia that are still shut down. This is an opportunity. If you have an outlook on your business, that outlook is positive, that there’s reoccurring revenue, reasonable, I’ll say, stability to EBITDA and cash flow, this could be the opportunity to take full advantage of positioning the business to make an acquisition or to do a divestiture that positions the business for the future.

CFOTL:
And if you have a list of capital equipment that you have been wanting to buy for some time, it might be time to invest in capital equipment. Agreed?

Bill Fink:
I agree. And from a number of viewpoints. So when you look at the present environment, you look at unemployment is near an historic low, recently 3.6%. A 50-year low is 3.5. You look at the JOLTS index, there’s a half a person theoretically for every job that’s available today in the marketplace. So there’s a huge imbalance.

So when I look at capital equipment and as I talk to presidents of companies, CFOs of companies, leading TD’s US Middle Market banking effort, you hear again and again, we’ve got to be more efficient. We’ve got to drive down our labor costs where it can, and not every business can take advantage of this. But are there ways to become more productive, efficient than what you are today? And part of that answer may come in the way of advanced robotics, I’ll say, business operations approaches that are different that bring efficiencies that you haven’t focused on in the past because labor had been there. Labor costs had been reasonably contained to what we’ve seen in the last 6, 12, 18 months.

CFOTL:
And your last item I thought was particularly interesting. It’s something that I think finance executives are routinely tasked with. I’m not sure they’re always getting it right, but it’s determine what’s impactful. What’s really making an impact here? And I guess you’re saying stay focused on that, or is it something different?

Bill Fink:
Well, that is part of it. And so it’s easy to say stay focused. That’s a very kind of topical statement. And I would say as I talk with CEOs, CFOs, what staying focused means is really trying to bring clarity where there’s tremendous ambiguity right now. There’s a myriad of, I’ll say, intersecting challenges that are not singular. And we like to boil things down to say, well, there’s one or two things we need to do to do X, to drive our business, to change our business. And as I talk to people, they laugh about it and say, Bill, don’t we all wish it was that simple?

And I really step back and say that there’s tremendous uncertainty right now, and it’s been layered in. It isn’t on all that it occurred. I think back, Jack, I can remember sitting in this office on March 19th, 2020, which was the last day we were in the office before we went all remote, and across the country businesses shut down. Across various states there were mandates to work from home. And that was kind of phase one. The COVID pandemic became real. We really understood what it was, what this health threat was. That was step one. We migrated through. Vaccines came.

But then kind of round two began to materialize and people stayed home and they bought certainly more tangible goods because services from restaurants to nail salons to getting simple haircuts wasn’t available. So the capital goods demand skyrocketed while we couldn’t keep pace from a production standpoint, a shipping standpoint, and then even COVID impacted the ability to ship, to produce. And then as a result, we’ve had a mass retirement that we’ve never experienced in such a compressed period of time. We’ve had labor disruption. Now we continue to have shipping disruption. So all of this has been like a big stew, if I could liken it to that. And to say they’ve got to stay focused, well, it’s staying focused and trying to decipher many different conflicting demands on the business.

And I look at it and say, step back. And really, as you try to do that, I look at it, your strategic planning and your operational planning and monitoring. If there’s anything that’s come out of the pandemic and the aftermath, the need for consistent strategic planning of which contingency planning is one small part, but then operational reviews to determine how the business is functioning, what’s impacting the business? Businesses that have that as an ingrained skillset have been able to find their way through, in my mind, and what we see at the bank more consistently than businesses who didn’t have those ingrained disciplines.

And so I would say the takeaway in this segment is do you have, from a strategic planning standpoint, operational control standpoint, do you have them embedded in your business? Because the ones that do have been able to weather this and I would expect continue to weather the unknown challenges that we’ll face into the future.

CFOTL:
Yeah. Great question for CFOs to be asking themselves. Bill Fink, Head of Middle Market Banking for TD Bank, thank you for joining us.

Bill Fink:
Jack, it’s my pleasure. Thank you for the opportunity. Please stay well.