Small BusinessCredit Risk
October 16, 2007
Seminar Agenda
About Sum2Recent Credit and Market EventsHow Credit Events Effect
LendersWhat Can a Small Business Do
About Sum2
Building Sound Practice Foundations for Businesses and Industries
Sum2 is dedicated to the commercialization of sound practices that address risk management, corporate governance, shareholder communications and regulatory compliance
Founded 2002
Product Suite
SMB 360°, Small and Mid-Size Business Risk Assessment and Management Tools
PACO™, Patriot Act Compliance Officer
AlphaSource, Portfolio Risk Analysis
Value Added Distributor
Some Partners and Clients
2007 Raging Bulls
Markets Awash in Liquidly
Premium Asset Valuations
Money Chasing Deals / Leverage Buying EBITDA
Kramer Going Wild
Kudlow and Goldilock’s America’s Cutest Couple
China and India Driving Demand
Signs of Froth Appear
Stephen Schwarzman’s Birthday Party
TXU, Equity Office, First Data, Sallie Mae and other Mega PE & LBO Deals
IB’s Buying Cash Flow Businesses
Hedge Funds Go Public
Dow Crosses 14,000
What Goes Up
Submerged Risks
Against Backdrop Of
Rising Interest Rates
Declining $ / Balance of Trade
Commodities Rising Oil Gold
Geo-Political Risk / War
Deteriorating Housing Market
Ballooning Deficit Spending
CRB Index Monthly Price Chart
Credit Market Problems
Sub Prime Mortgage Crisis
Commercial Paper Market
Contagion to Hedge Funds
Securitization : Structured Finance / CDOs
Funding Sources : Risk Aversion / Liquidity
Housing Crisis: Housing Bubble or Lending Bubble?
Change in Valuation Metrics/PsychologyCredit Default SWAPS / Level 3 Assets
Banks Assuming Higher Credit Risk
Kamakura Reports Fourth Consecutive Monthly Decline in Global Credit Quality
Kamakura Troubled Company Index Rises to 8.0% in September
Anecdotal Observations
Report: More Than 300K Ohioans Trapped In Payday Lending Debt(More than 300,000 Ohioans are trapped in a cycle of debt to payday lenders and are paying more than $318 million in payday loan fees each year)
Private Student Loan Bubble Could Burst
New Century Financial Chapter 11 Filing
Bank Earnings and Write Offs
Pascack Valley HospitalImpact of a Credit Default Event
Systemic Event
$100mm Debt
$20mm Outstanding Payables
$80mm In Bonds Outstanding
Shut Down Of Services
Layoff Notices To 700 Employees
Pascack Valley Hospital Closure
Pension’s
Local Businesses
Vendors
Spouses of EE’s
Housing Inventory
Mortgage Defaults
Community Tax Revenue
Where's Goldilocks?
Recession
Inflation
Deflation
Stagflation
Dollar Based Assets
Corporate Earnings
Taxes, Deficits, Trade
Yield Curves and Equities
Bernanke Goes Greenspan
Federal Funds Rate
Sources of SMB Funding
Existing Shareholders And Directors Funds (“owner financing”)
Overdraft FinancingTrade CreditEquity FinanceBusiness Angel FinancingVenture CapitalFactoring And Invoice DiscountingHire Purchase And LeasingMerchant Banks (medium to longer term
loans)
SME Finance Sources
Self FinancingLoans
Bank Loans Credit Card Debt People to People
Investment CapitalGrants
SME Self Funding
Existing Cash Flow Assumes Strong Cash Management Predicable Consistent EBITDA Predictive Cost of Sales Margins and Pricing Power
Receivables and Factoring Assumes Clients Good Credit Risk More Exacting Factoring Standards Strong Credit Risk Management
Culture Higher Cost of Capital
SME Self Funding
Personal Capital 401K Investment Portfolio Home Equity
Risk Premium On Collateral Valuation And Market Risk
Private Equity
Angels Capital Adequacy
Private Equity Secure Funding Sources Equity Premium Exacting ROI Discipline
Banks Response
More Stringent Credit Guidelines Credit Risk Management Response
Capital Allocation Requirements Regulatory Response
Consolidation and Rationalization Market Response
Small Business Scoring Solution
SBSS 6.0 Fair Isaac
SBSS 6.0
Empirically Derived Scores For Startup Businesses
Credit Offer Index Size Of Loan Indexed To Industry Experience
Divergence And Kolmogorov-Smirnoff (K-S) Profiling, Identifying And Scoring Bad And Good
Accounts
60 Other Models That Use Application Data, Sector, SIC And Other Derived Elements
Capital Allocation RequirementsRegulatory Response
Capital AdequacyDefine Risk Characteristics Of Business
Lines And Market Segments
Allocate Regulatory Capital To Fund That Risk
SMB 360° Product of Basel II SME Initiative
FDIC Chart: Capital Adequacy Regulatory Capital to Cover Loan Losses
Banking Market
Community Banks Under Pressure
Competitive Landscape S&L For Retail Bulge Bracket Banks Commercial Brokers For Wealth Management Private Equity Mortgage Brokers
Market ConsolidationRationalization
Sum2’s NJ Community and Russell 2000 Bank Study
Acute Competitive Pressure
Concentrated Regional Risk
Slowing Earnings Momentum
Rich Valuations High P/E’s (M&A)
Regulatory And Economic Capital Strain
SBA Study
Our statistical analysis finds that small businesses receive less credit on average inregions with a large share of deposits held by the largest banks, irrespective of how debt is
measured.
Notable details about this primary finding are that:
When access to credit is measured by credit limits, reductions in lending in response togreater market share by large banks is larger than when credit access is measured byactual credit balances. This means that the market for un-accessed lines of credit ispotentially most affected by banking consolidation.
Credit reductions appear more severe in total when access to credit is examined throughthe dichotomous decision to obtain credit, than when the amount of debt as a share ofassets is used as a measure. Thus banking consolidation is more likely to affect thedecision, by either the small business borrower or the banking institution, to borrow,rather than affect the actual level of debt.
*Credit reductions in areas dominated by large banks are found to occur both for firmswith positive, and with negative, equity. Bank credit reductions are found to be more
*Most importantly, we find that non-bank financial institutions are making up part of thecredit reduction in terms of the level of credit conditional on borrowing, but notcompletely in the case of access to credit.
*The activity of the non-bank financial institutions appears to be especially important forfirms with negative, rather than with positive, equity.
These findings are essentially mirrored when we look at the individual credit instrumentsof lines of credit, and other loans, although with some important exceptions. As we find for totalcredit limits, non-bank institutions are not able to compensate for lines of credit accessreductions resulting from a greater share of large banks. Additionally, non-bank institutions arenot able to make up for shortfalls in credit limit levels. In other loans, however, we find thatnon-bank institutions do compensate for reductions in bank credit, although the finding isstronger for credit levels than credit access.
One set of small firms that therefore seems to be affected by banking consolidations arethose that use lines of credit for assurances to customers and suppliers, rather than as a source ofloan funds. It is possible, therefore, that these small businesses are finding it more difficult toconduct their business with a reduced ability to access credit. This concern is accentuatedbecause we find credit reductions are more significant for firms with positive equity, than withnegative equity. Conversely, it is also possible the changes we observe in the market for smallbusiness credit do not fully reflect the market for financial insurance needed to conduct somebusinesses, and another market mechanism rather than traditional lines of credit has arisen whichallows small business firms to fully conduct their business in competition with large andestablished firms
SBA Study
The Impact of Bank Consolidationon Small Business Credit Availability
By Steven G. Craig and Pauline HardeeHouston, TX
For SBAunder contract number SBAHQ-02-M-0459Release Date:
SBA Study
SMB 360°
Risk Assessment & Management ToolsScore and Manage Business Threats
Business Strategy & Targets
Business Market & Competition
Business CapabilityBusiness & Financial Planning Business Risk Management
360° View of Risk and Opportunities
Template 1: Market and Competition Assessment Template 2.1: Product Service Grouping, CustomersTemplate 2.2: Product Service Grouping, SuppliersTemplate 2.3: Product Service Grouping, CompetitionTemplate 2.4: Product Service Grouping, Market DynamicsTemplate 3.1: General ManagementTemplate 3.2: Sales/ Marketing ManagementTemplate 3.3: Operations and Production ManagementTemplate 3.4: Facilities ManagementTemplate 3.5: Financial ManagementTemplate 3.6: Planning and Information Management Template 3.7: People and Human Resource Management Template 4: Financial RatiosTemplate 5: Business and Financial Plan AssessmentTemplate 6: Scoring Specific Critical Success FactorsTemplate 7: Scoring Generic Critical Success FactorsTemplate 8: SWOT AnalysisTemplate 9: STEEPLE Analysis
Engagement Tools for Bankers and CPAs
Why Did You Choose Them?TransparencyGood Risk ManagementAble ManagementCritical AssessmentUnderstand Business ProcessConfidence in Product and StrategyRisk Factors are Known
Why Do SMBs Choose You?
Differentiators
Communication
Shared Goals
Understanding
Delivering Value Add
Prescient Tools
Relevance
S Social (e.g. changes in social behavior that might impact product / service selection);
T Technological (e.g. rapid development in cheaper components that will affect product prices or performance);
E Economic (e.g. non-US exchange rates affecting key imported supplies);
E Environmental (e.g. waste re-cycling legislation and penalties on producers);
P Political (e.g. government directives on certification or subcontracting);
L Legal (e.g. changes in employment laws)
E Emerging (Domestic Regulatory or International) (e.g. NAFTA, or World Trade Organization agreements affecting market dynamics and competitors)
Steeple Analysis
Steeple Analysis
Social RisksColumbus parade in Lodi and Garfield Canceled Because Of Pulaski Conflict
Steeple Analysis
Technological Risks
Lucent Technologies Over Reliance On Central Switching Long Lines Business
VOIP and Wireless
Offset Printers, Film Developers
Steeple Analysis
Economic Risks Outsourcing Manufacturing IC/Barriers to Entry
Cost of Capital
Weak Dollar
Energy Costs
Recession
Macro/Micro
Environmental Risks
DEP Releases Ranks Top Risks to New Jersey's Environment and Human Health
Land Use Change Poses a Major Environmental Threat to State, indoor and outdoor pollution, and invasive species as major threats to New Jersey’s environment and people.
United Water’s product has high sodium content due to salt spreaders
Climate Change Opportunities & Threats
Steeple Analysis
Steeple Analysis
Political Risks
Local Level Zoning, Community
Standards, Education
National Level Taxes, Infrastructure,
Immigration
International Level Trade and Stability
Legal Risk
Sarbanes Oxley, Patriot Act, HIPPA, OSHA, DEP, EOE
Product Liability Feds Demand N.J. Tire
Importer Pay For RecallChinese Manufacturer
Denies Responsibility
Steeple Analysis
Emerging Risks
CAFTA and NAFTAClimate ChangeRegime ChangeLaissez-faire / RegulationGlobalization and Market
Stability
Steeple Analysis
Sum2 is dedicated to the commercial promotion of sound practices. Sum2’s objective is to assist businesses to implement corporate sound practices that add exponential value for shareholders, employees, clients and to the communities in which they operate and serve.
Sum2 identifies its core competency to be the creative application of sound practice principles to the industries and businesses that we serve. Sum2’s SMB 360 is a clear example of this creative application of sound practices to an industry need. Sum2 is dedicated to corporate responsibility, ethical business practices, customer service excellence and delivering to our clients a unique and essential value proposition. We uphold these values in all our work and continually strive to deliver on the commitments that we make to our clients.
All products marketed by Sum2 are focused on risk mitigation. We look to creatively package and bundle solution suites that address targeted client and industry market segment requirements. All product marketing activities and business development initiatives are guided by and conform to a clearly identified industrial application of sound practices.
We appreciate your business and look forward to hearing from you about our products and how we can improve it.
PO Box 184 Little Ferry, New Jersey 07643
201.440.1173 [email protected]
Citations
Dow and Nikkei
http://www.the-privateer.com/chart/us-jpn98.html
300,000 Ohioanshttp://www.starbeacon.com/local/local_story_263024729.html
FDICKey Aspects of the Proposed Rule on Risk-Based Capital Standards: Advanced Capital Adequacy Frameworkhttp://www.fdic.gov/news/news/financial/2006/fil06086a.html
Yardenihttp://seekingalpha.com/article/16521-housing-crisis-housing-bubble-or-lending-bubble
Columbus and Pulaski
http://www.northjersey.com/page.php?qstr=eXJpcnk3ZjczN2Y3dnFlZUVFeXkzNTcmZmdiZWw3Zjd2cWVlRUV5eTcxOTk3NDAmeXJpcnk3ZjcxN2Y3dnFlZUVFeXkz
NJ DEP Studyhttp://www.nj.gov/dep/newsrel/releases/03_0106.htm
NJ Tire Distributor
http://www.consumeraffairs.com/news04/2007/06/china_tires03.html