Bank Lending Troubles – Continued Uncertainty

According to a recent article in CFO magazine, the Bank for International Settlements, “the bank for central banks,” issued its annual report published Monday. The article “Banks Not Out of the Woods“ highlighted several points about the state of banks in the US:

1) Concerns over the impact of new regulations on the health of banks

2) Writing down losses – balance sheets are generally weaker than reported, as banks have not been forced to write down the real value of many assets.

3) Commercial real estate portfolios: In the US, more than 100 community and retail banks have a ratio of commercial real estate to total loans of more than 50%. Delinquency rates on these loans rose to more than 8% in the U.S. last year, double the rate a year ago. Congress is even considering inserting a provision in the financial reform bill that gives 7,800 banks permission to spread their losses on real estate loans over a 6-to-10-year period.

4) The BIS is doubtful that banks will be able to refinance their huge funding needs, given that funding maturities for banks are at their shortest in 30 years. In the United States, hundreds of small banks have yet to repay Troubled Asset Relief Program funds, and some have also failed to make required dividend payments to the government.

5) The Spread between the interest rates that banks can borrow at and the rates that banks are actually charging consumers for mortgages represents one of the largest profit margins banks have had for a long time. However, this may be providing false support as it cannot continue forever.

Oklahoma perspective

As we have written before, we are fortunate in this state that most of our banks have had more conservative lending practices and have therefore been less susceptible to the scope and scale of banking problems elsewhere. However, the entire banking system is linked together, so we need to keep our eye on the big picture.

Business Bank Lending Declines

Current state of Bank Lending – Business Lending

US Bank lending (Commercial & Industrial Lending) as reported by the Federal Reserve Bank continues to decline and was down 18% in May year-over-year. This 18% decline is twice as severe as the previous worst decline in history of 9.3% in 1949. And the monthly declines show little signs of slowing. See chart in this story, which shows percentage year-over-year declines in lending.

Current state of Bank Lending – Real Estate Lending

The picture is even worse for real estate lending at US banks. For the first time on record, we are seeing annual declines in real estate lending, down 4.6% over the same period last year. Until 2009, there had never been a year-over-year decline in real estate lending in the US and this may continue to worsen.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010. About ClearRidge Capital ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms. ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada. Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values. For further information, visit www.clearridgecapital.com.

Critical Business Improvement. Restructure in 2010.

If you’re a business owner, chances are you may feel that the term “Restructuring” does not apply to your business.  That may be because you associate the word with a business that is struggling, nearing bankruptcy or already in bankruptcy.  The fact of the matter is that many of the best run companies in the world restructure their business on a regular basis.  When your company is healthy and strong is the best time to consider a restructuring process.  In fact, if a business is in or nearing bankruptcy, it may already be too late for restructuring to be effective.


There are typically three different types of restructuring that a company can undertake:  financial, operational and strategic.  A combination of these is commonly referred to as Corporate Restructuring. For healthy companies, they can be conducted separately, but for those under stress, it may make sense to engage in all three types of restructuring concurrently in order to have the most significant impact in the shortest period of time.   In this article we will explain the three types of restructurings and how they can help your business.


Financial Restructuring


Financial restructuring is the process of reorganizing a company’s existing financial structure to match its’ short-term to long-term capital needs. A business, by its very nature, is in a constant state of flux and as a result, its financing needs are continually changing. The art of restructuring is determining a capital structure that is most appropriate for a business’ changing capital needs.


A critical aspect of financial restructuring is ensuring that the existing capital structure (debt and equity) is appropriate for the company’s current income, forecasted income and revenue growth plans.  As a business owner, you need to keep a close eye on your current financing agreements and understand how specific changes in market conditions, revenue, costs and profitability can affect your ability to meet existing loan covenants. 


Lenders like a clear picture on which to base their financing decision. You need to proactively develop and maintain a current business plan that allows for a range of scenarios of the future financial performance. Pro-active planning should give your lender a clear picture and increase your chances of renegotiating debt.


Financial restructuring also includes the implementation of processes to track the flow of cash in and out of your company by creating a weekly cash flow forecast, typically looking forward 13 weeks.  This allows you to identify any gaps you may have on the horizon and provide plenty of time to address those capital requirements. 


Another component of financial restructuring is to identify your key vendors and customers and negotiate better terms with them. Your aim should be to reduce the cash conversion cycle, i.e. extend payment terms with vendors and shorten payment terms with customers. We would recommend, however, that you carefully plan and rehearse these negotiations, so as not to appear in distress. You should have a clear and credible message about the future of your company.


Operational Restructuring


Operational restructuring refers to the process of analyzing and improving the core and non-core operations of your business.  This can be anything from lean techniques, implementing better operational systems and processes to analyzing capacity utilization and improving efficiencies. In certain circumstances, it may lead to elimination of product lines, services or entire divisions that are a drag on the overall performance of the business.


Benefits of operational restructuring include improving profitability and better leveraging the existing resources of your company. It may involve implementing new systems, processes and tools to better track, monitor and adjust the operations of the business.


Strategic Restructuring


As market conditions change over time, it is important to adjust your business strategy to stay ahead of the competition.  Strategic Restructuring is the process of evaluating and adjusting your strategy given current and anticipated market conditions. It also considers the different opportunities that exist to pursue revenue growth.


Subtle shifts in the market are often overlooked. These shifts often develop into major trends. Unless you are on the lookout, it is easy to miss the early signs of change and suddenly find your business struggling where others are picking up market share. Management need to recognize changing conditions, make appropriate and actionable plans and continually adjust their strategy accordingly.


Conclusion


The corporate restructuring process is for all companies, not just those in trouble. It is critical for market leaders as well as market laggers.  And what you will find is that the mere process of evaluating a restructuring of your company will yield significant dividends, not only in performance and the ability to make better decisions, but may also uncover data, information and trends about your business.


And please don’t be nervous about talking to a restructuring professional, advisor, or whatever else you may want to call us. We know that we are not an expert in your business. Whether or not we have worked in your industry for years, we will never know it as well as you. Lack of specific industry knowledge, however, doesn’t affect our ability to make a real difference to your business. Whether it is guiding you to implement better systems and processes, streamline your business, identify new cost saving techniques or new revenue opportunities, there is nearly always a benefit from a trained set of eyes guiding you through a restructuring process.


In the end, we help you make better decisions. We give you the tools and structure to better analyze your business and deliver critical business improvement.



All rights reserved. Copyright: ClearRidge Capital, LLC, 2010. About ClearRidge Capital ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms. ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada. Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values. For further information, visit www.clearridgecapital.com.

The Business Sale Process: Private Auction vs. Negotiated Sale

When selling your business, there are several different methods to choose from; a broad auction, a private auction and a negotiated sale. In most cases, the owner of a privately held company wants the highest degree of confidentiality. They want to minimize disruption to customer, supplier and employee relationships. Owners also want to mitigate the risk of competitors discovering their intent to sell and using it as a tool to try and gain market share from them.


For those reasons, we are not going to discuss the public auction process, which is most often used for publicly held companies and is the least confidential. Instead, we will focus on the two methods for selling your business that provide a higher degree of confidentiality and that occur most frequently in the middle market. 


Private Auction (Controlled Auction)


First, we need to dispel the myth that a private auction works in the same way that you would see at an auto auction. To start with, there is no auction room. The term private auction simply describes the process through which you encourage competing buyers to pay a higher price and better terms for your business.
Controlled auctions may include on average five to fifteen interested buyers, which we’ll refer to as “buyer prospects.” After extensive planning and analysis, your M&A advisor will prepare a confidential memorandum, which describes the company’s stock or assets to be sold, as well as the business opportunity for the acquirer. Other information in the memorandum may include the history of your company, products and services, explanation of processes, business model, customers, industry reviews, geographic coverage, strategy for growth, ownership, legal structure, facilities, people, competitors, competitive advantage, assets and capital expenditures.


Next, potential buyers need to be identified and contacted. Your advisor will go through all their existing contacts and relationships, as well as conduct a fresh search of all likely buyer candidates. After receiving an executed nondisclosure agreement from interested prospects, your advisor will request your approval to send them the memorandum, which includes a timetable for the auction process.


After follow-up conference calls and additional information requests, your advisor will request a preliminary indication of interest from each prospect. You will then choose the most qualified and most likely buyer prospects who will be granted access to additional information in a secure data room and possibly a conference call or meeting with you.


At this point, buyer prospects are requested to submit an indication of interest with a range of offer prices based on different variables. The concept is to keep moving forward and reducing the number of prospects until you are left with the most serious buyers who are most willing and able to pay the highest price at the most favorable terms.


The next step is to rank the buyer prospects into a list of buyer candidates in order of priority.


With your consent, the advisor will then request submission of a LOI (Letter of Intent) from the lead buyer, which is a non-binding commitment to purchase the company.


A more detailed description of the sale process can be found on ClearRidge’s website:
http://www.clearridgecapital.com/saleprocess.htm


Advantages of a private auction


A private auction is typically appropriate when you are able to identify multiple potential buyers. The process is designed to increase competition between potential buyers, thereby increasing your negotiation power and maximizing the bidder’s price and improving their offer terms. As the seller, you have better negotiating strength and a better chance of closing the deal with one of your preferred buyers.


Disadvantages of a private auction


A private auction is typically a more complicated and costly process than a negotiated sale. Even though all dissemination is private and to a pre-screened group, it does make the sale more widely known and increases the potential risk of other people finding out. Additionally, certain companies might not want to participate in an auction process. This could be because it’s unfamiliar, or maybe because it is more complicated and with a pressured timeline. 


Importantly, it should be known that in both the private auction process and a negotiated sale, there is no “listing” of the business for sale, nor is there any kind of public announcement. It is a targeted, confidential and specific outreach to possible buyers.


Negotiated Sale


In contrast to a private auction, a negotiated sale involves only one to maybe a handful of interested parties. In situations where you have a clearly identified potential buyer and want a speedy and confidential process, a negotiated sale will likely be more appropriate than a private auction process. A strategic buyer typically expects to benefit from synergies between the companies and therefore may be willing to pay a fair price without the added pressure of a private auction.


In contrast to a private auction process, garnering a high price in a negotiated sale may not be an easy task as the lack of multiple alternative buyers diminishes your negotiating power. 


A negotiated sale tends to be less disruptive to the continuing operation of your business, as you are not so tied to the particular deadlines and time requirements of a private auction. However, extensive due diligence is common in a negotiated sale, which can divert management’s attention away from daily operations. One possible solution, which is often overlooked, is to conduct the majority of the due diligence assignments in 
advance of the sale process in your own time at your own pace, so that any information to be requested by the buyer is already available and just needs refreshing and updating as the sale process moves along.


Conclusion


It is important to note, however, that these two types of sale process do not have to be entirely distinct from one another. For example, it may make sense in a business sale to take the early steps of the auction process, including narrowing down a full spectrum of potential buyers, then pre-screening them for industry, products, services, capabilities, size and profitability. Then take the most qualified buyers from this list and discreetly determine the value range they would offer for a company with the same profile as your company. You could use these buyer prospects to validate the best offer from your preferred buyer.


Whichever process you choose, it should take less time and run more smoothly overall if you do most of the work up front. Buyers prefer, and will often pay a higher price for a company whose sale process is organized, efficient and time-effective. It is a good reflection of the efficiency of operations and overall management of the business. 


In choosing the right process for your unique business and situation, it is a good idea to discuss your thoughts with an advisor and consider the market environment in which you are trying to sell, your objectives, concerns and also the likely number and type of potential buyers. An experienced M&A advisor will also help to manage the process and ensure that you are able to realize your goals from the sale.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010. About ClearRidge Capital ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms. ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada. Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values. For further information, visit www.clearridgecapital.com.

KEY PLANNING REQUIRED to Successfully Integrate an Acquisition

Even though most mergers or acquisitions start out with the best of intentions, numerous studies have shown that the majority fail to increase enterprise value.

This is highlighted by the following statistics from The Wall Street Journal, Forbes, Fortune and CFO.com:

• 70% of M&A deals fail to achieve the anticipated synergie

• 50% report a drop-off in productivity in the first 6 months post closing

• 47% of acquired company executives leave in the first year, and 75% of executives leave within the first 3 years

• Management grade the financial performance of their acquisition as a
  C minus on average.

Create an Integration Plan

So, how can you make sure your business is on the right side of these statistics?

Owners and managers need to put substantial time and effort into an M&A integration plan. Closing the deal is just the beginning. Before closing, you should have clearly defined your deal drivers and put them in measurable and quantifiable terms. Integration efforts should focus on delivering these goals and give you the framework to identify the critical action plan to achieve these goals.

Additionally, you need to determine the key success factors from the newly acquired company, which you may want to adopt in the existing company. Ideally, you will have two companies which learn and adopt best practices from each other to add value to the company as a whole.

Early on, you need to determine the degree to which the new entity should be integrated with the existing entity. Do you want it to remain largely independent, share the same corporate culture, processes and technologies, or maybe somewhere in between?

In making that decision, you need to look deep inside both companies and consider how they may or may not fit together. And don't make that decision from the sanctity of your office. You need to go down to the shop floor, talk to your managers, employees, live and breathe the heart of the two companies.

Based on this understanding, you should try and customize your integration structure and approach, then develop a plan for the first 100 days post closing. And then constantly refer to that plan so as not to lose sight of important items during the frenetic first few months.

Don't be afraid to adjust the plan based upon new findings after closing. This should also allow you to increase input from both sets of employees as they see the ongoing implementation and impact of the integration plan.
Leadership

Key people should be identified to manage the integration process. They need to quarterback the process while you retain the coach's role. Clear leadership roles are critical to minimize uncertainty, assign accountability and define authority.

Make sure that you have leaders on your team who are trustworthy, communicate well in both organizations, and can handle the inevitable uncertainties and morale issues with care. Leaders should be able to respond to changing conditions while keeping the strategic vision of the deal in mind and need to act according to the culture that you want to instill in the entity.

Communication

According to Watson Wyatt Worldwide, 90% of acquirers agree that communication is important but only 43% deem that communication was effective and successful in their integration. Communication success depends on paying attention to all groups involved with adequate attention focused on senior management, while at the same time providing clear and consistent messages to all employees from day one. Unfortunately, many integration leaders fail to communicate early and often.

Delay = Uncertainty = More Disruption = Decrease in Morale
= Loss in Productivity and Increased costs

Culture

The set of norms, values and assumptions governing daily actions and interactions are another critical issue that many acquisition integrations overlook. Most often an acquirer hopes to maintain its own culture and hopes that the new entity's culture merges into its own. But that doesn't really make sense.

Before you closed the deal, you likely placed a high value on the people in the target company. If you don't observe, understand and respect their culture, you will not only erode their productivity, but will also lose many of their key people. You need to carefully consider how their culture works and carefully design and implement incentives, compensation and benefits to reward behaviors that you believe are critical to the success of the integration and work within their culture.

Speed of Integration

Despite the fact that many managers like to take their time in integrating firms post closing, a 2008 study by PricewaterhouseCoopers suggests that waiting is a mistake.  According to PwC, people are most open to changes in work culture and processes during the first 100 days.

A timely integration leads to improved employee commitment, lower employee turnover, improved focus on customers and improved adoption of new technology.

Conversely, prolonged transitions slow growth, decrease profits, erode morale and reduce profitability.

If you take too long getting to work on the integration, your company could lose market share and miss the best opportunities to deliver the anticipated synergies of the acquisition.

Conclusion

Companies that adequately plan and deliver on M&A integration issues should significantly increase the likelihood that their acquisition works out as everyone had hoped. So, remember the following three steps:

1. Gain knowledge about both businesses
2. Apply knowledge with a clear plan of action and constantly refer back to the plan and intended goals
3. Deliver the integration plan in the first 100 days. Track, monitor and adjust to deliver integration goals.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.


About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.


ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.


Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.


For further information, visit www.clearridgecapital.com.

Selling Your Company in 2010? More Analysis Is Required

More Analysis Required
If you're going to sell your company in 2010, you need to think differently. Yes, there are buyers lined up with cash right now, but most are either looking for a high growth company that has been bucking the negative economic trend, or they're looking for a stressed balance sheet and shaky capital structure to pick up a "good deal."

For companies that are somewhere in the middle, you need to be better prepared than ever before. Buyers are going to be more critical and more likely to submit a low purchase offer unless they have a real understanding of your business. To submit a fair value purchase offer, they need to be convinced of the opportunity.

You need to have clear data and analysis of your business, systems and processes before you talk to any prospective buyers. This is in addition, to the more obvious steps of highlighting competitive strengths, weaknesses, business outlook, opportunities and benchmarking. Clear means well documented and easily understandable to an independent person who has no prior knowledge of your business.
Why is this data and analysis so important? Because when a buyer makes an offer to invest in your business, they should be well informed and understand the business with an insider's knowledge. If that happens, they feel less uncertainty. Less uncertainty = less perceived risk = higher purchase price.


To illustrate this point, it is useful to consider some of the differences between the equity valuation of a public company and a private company.

Public

Private

Information Publicly Available Audited Financials Daily Pricing Information (Stock Price) Daily Analysis by thousands of analysts Highly Regulated Equity Liquidity Highly Liquid Instant trading of minority interest (stock market) Industry of brokers, agents and market makers All sources of capital available High competition for lending and investment Public Auction Process to Sell Majority Interest Valuation Multiple Relatively HIGH

Information Little Pricing/Valuation Information Rarely Audited Financials Non-GAAP Accounting Data available, but little or no analysis Slight or No Regulation Equity Liquidity Low liquidity Few ownership/equity transfers Majority enterprise interest Fewer sources of capital available Less competition for lending Negotiated Sale or Private Auction Process Valuation Multiple Relatively LOW

Investors in public companies have easier access to more reliable and timely information, data and analysis than investors in closely held private companies. Why is this data and analysis so important? Because when a buyer invests in a public company, they are informed with research from thousands of analysts from many different perspectives. As a result, there is less uncertainty risk. At the time of writing this article, the average PE ratio for the S&P 500 was 20 compared to an average 5.2 adjusted EBITDA multiple for middle market private companies, according to a recent AM&AA report.

Yes, there are other factors to consider when comparing public to private valuation, such as stability and liquidity, but the bottom line is that investors will pay a significant premium for "ABC Manufacturing" public company than the comparable "XYZ Manufacturing" closely held private company. The price premium can be double, triple or more. Therefore, unless the buyer of XYZ Manufacturing has a deep insight into the business before they make an offer, they're going to price in their uncertainty with a lower multiple.

Let's be realistic. A private company is rarely ever going to sell for a public company multiple, but just bridging some of this information gap and shifting 10 or 20 percentage points towards a higher multiple can mean millions of dollars to you.

So, what can be done to bridge this gap? If you look at the typical closing process when you buy a closely held company, there is a boilerplate due diligence list. And due diligence nearly always begins after the sale price has been negotiated and the letter of intent has been executed.

If you're the seller, this is counterintuitive. If you want a buyer to stretch and pay maximum price for your business, they need to be fully informed when making an offer. After signing a letter of intent, they only have two real options. They either buy your business for somewhere close to the negotiated sale price or walk away. Yes, a buyer will often use due diligence to try and negotiate lower, but the majority of negotiations are already complete by that point.

It has been proven to us time and again that it is better to lose a buyer earlier in the process than have them make an uninformed low ball purchase offer.

You should spend time preparing insightful analysis of your company before negotiating with a buyer. It is natural to want to get a feel for the market value of your business before spending too much time, but by moving forward too quickly, you will lose negotiating strength and are unlikely to ever find out what the market could really pay.

So, what analysis do you need to perform? Well, we can't give away our proprietary process, but it comes from the experience of the buyer's perspective and seller's perspective from countless acquisitions. It also depends on the size, type and complexity of the business. One thing is for sure, however. When a ClearRidge client brings a company to market, prospective buyers will have access to relevant, concise and convincing analysis, so their offer is going to be based on a much clearer understanding of the business. You will lose some buyers in the process, but you'll also sort through to find motivated prospects who are more likely to meet your price expectations.


All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.


About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.


ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.


Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.


For further information, visit www.clearridgecapital.com.

Cost of Debt and Equity Capital in 2010

Source: Pepperdine University Private Cost of Capital Survey

Pepperdine University, along with research contributor Robert Slee, conducted the first ever private cost of capital survey (PCOC), which was the first survey of its kind to provide information on the capital markets for small to midsized US companies.

They surveyed senior lenders (typically banks), asset-based lenders (ABLs), mezzanine capital, private equity and venture capital as they relate to midsized private companies.

This survey may be useful for your business, as the results highlight the benchmarks that must be met to qualify for capital, along with the required investment returns for the capital providers.

Armed with this information, you should be better able to plan your budget, your ideal capital structure and determine the likely cost of capital in 2010.

We are going to summarize what we think are some of the most important points, but would also encourage you to download the full 67-page survey.

At the end of this email, we provide a link to go to Pepperdine University's website to download the complete survey.

BANKS (Cash-Flow Lending)

Interest Rates

According to Pepperdine's survey, over half of banks responded that their current all-in interest rate (including spreads over prime and LIBOR) is between 6% and 6.5%, with the remainder lending at rates between 6.5% and 7.5%.

44% of loans were refinancing existing debt as opposed to loans for working capital, acquisitions, new equipment and other purposes. While they didn't expect lending rates to increase significantly, most banks expect lending to become more restrictive through the middle of 2010.

ClearRidge: Please take action early in preparation to refinance debt. A major concern is the number of business owners that are going to be surprised by higher loan costs and tighter credit requirements when it comes time to replace debt. That, coupled with declining bank lending levels throughout 2010 will likely lead to liquidity problems for thousands of US businesses.

Fixed or Variable Rates - 38% use fixed rate and 62% use variable rates, of which most are pegged to prime.

Median Credit Ratios

Fixed-Charge Coverage (Min): 1.2

Funded Debt to EBITDA (Max) 3.0

Debt Service (Max) 1.25

Debt to Net Worth (Max) 3.0

Covenant Thresholds

Max Debt/ Total Assets 3x

Min Cash Flow Percentage 125%

Min Fixed-Charge Coverage 1.2x

Max Debt/EBITDA 2.75x

You will notice that these ratios and thresholds are more restrictive than in recent years when many businesses last refinanced debt.

ASSET-BASED LENDING (includes some banks)

Asset-Based Lending focuses mainly on collateral and liquidity; whereas a traditional bank loan focuses mainly on cash flow. An ABL is a loan secured against the assets of a company - mainly inventory and accounts receivable, but sometimes also machinery and equipment, intellectual property or trademarks.

[Banks also operate within this category and sometimes offer a blend of cash flow and asset-based loan.]

Asset-based loans are typically categorized into three tiers depending on loan dollar amount:

Tier 1 loans : >$10M; Tier 2 loans: $3-$10M; Tier 3: <$3M

Interest Rates

According to Pepperdine's survey, variable interest rates in 2009 and 2010 are ranging from prime plus 0.5% to prime plus 16%. For larger loans typically pegged to LIBOR, rates range from LIBOR plus 3.5% to LIBOR plus 6%.

Other fees

ABLs may also have closing fees ranging from 0.5% to 4% of the loan amount; modification fees from 0.1% to 3%; commitment fees from 0.5% to 1.5%' collateral monitoring fees from 0.1% to 12%; unused-line fees from 0.25% to 1%, as well as audit fees, attorneys' fees, insurance, annual and due diligence fees.

ClearRidge: In other words, it's important to look beyond the headline rate and determine the all-in cost of an ABL, which will likely cost you north of 10% and can be as high as 35%.

Over half of Asset-Based Lenders expect prime rate to increase, LIBOR to increase and credit spreads to widen through mid 2010.

Median Credit Ratios

Fixed-Charge Coverage (min): 1.0

Funded Debt to EBITDA (max) 4.25

(compared to bank lending max at 3.0)

Debt Service Ratio (min) 1.2

Lending Advance Rates

Accounts Receivable: 85.0%

Inventory - Low quality: 22.5%

Inventory - Intermediate quality 35.0%

Inventory - High quality 55.0%

Equipment 67.5%

Real Estate 65.0%

Land 50.0%

Firm's Cash Flow 65.0%

Marketable Securities 80.0%

Refinancing accounted for over half of ABLs, followed by acquisition and growth financing. In spite of rising costs, almost every asset-based lender expects demand for ABLs to increase through 2010.

ClearRidge: When traditional bank lending becomes too restrictive or is unavailable, many businesses will turn to ABLs to refinance their debt.

MEZZANINE CAPITAL

According to Pepperdine's survey, all-in interest rates for mezzanine loans are currently running at around 18%.

Mezzanine is most often used to fund a management buyout, growth or acquisition financing, with only about a third for refinancing.

Most mezzanine capital loans would be made to firms with more than $10M in annual sales and for loan amounts between $1M and $10M. One in three mezzanine loans are straight interest, with two thirds comprising interest plus stock warrants.

Pre-funding Median Ratios

Total Debt to EBITDA (max) 3.75

Senior Debt to EBITDA (max) 2.5

Fixed-Charge Coverage (min) 1.2

Median Financial Ratios

Maximum Multiple of Recast EBITDA 4.0

Maximum Multiple of Operating Cash Flow 4.0

Maximum Total Debt to EBITDA 4.0

Maximum Senior Debt to EBITDA 2.5

Minimum Fixed-Charge Coverage 1.2

PRIVATE EQUITY

According to Pepperdine's survey, Private Equity in today's market has an expected annual rate of return of between 20% and 30% on new investments.

Only 7.5% of private equity funds will consider an equity investment of $1M or less, but around 40% will consider an investment smaller than $5 million. Two-thirds are control investments and one third are non-control.

The median targeted equity ratio as a percentage of invested capital in each deal is 41%, with a range between 20% and 50%.

ClearRidge: This equity ratio is in contrast to the easier credit days in 2007 and 2008 when private equity would rarely need to contribute much more than 20% equity to the capital structure.

VENTURE CAPITAL

According to Pepperdine's survey, VCs currently have an expected rate of return on investment of 40% to 43% for each investment they make. However, the average rate of return for realized investments in prior funds is between 24% and 29%.

Below is the Pepperdine Survey's summary of VC investment stages:

Stage 1: 22.5% of VC investments fall into this category.

No product revenues to date and limited expense history, typically an incomplete management team with an idea, plan, and possibly some initial product development. Expected exit by VC in 6.2 years.

Stage 2: 17.0% of VC investments.

Still no product revenue but substantive expense history, as product development is underway and challenges are thought to be understood. Expected exit by VC in 5.8 years.

Stage 3: 17.8% of VC investments.

Significant progress in product development; key development milestones met and development is near completion, but generally no product revenue. Expected exit by VC in 5.1 years.

Stage 4: 28.3% of VC investments.

Additional key development milestones met and some product revenue, but still operating at a loss. Expected exit by VC in 4.8 years.

Stage 5: 10.9% of VC investments.

Product revenue and operating profitability or breakeven/positive cash flows. Expected exit by VC in 4.0 years.

Stage 6: 3.5% of VC investments.

Established financial history of profitable operations or generation of positive cash flows. Expected exit by VC in 3.5 years.

Summary of Capital for Business in 2010

To reiterate what we said in 2009, we would urge you to be thoroughly prepared when it comes time to refinance or recapitalize debt. The credit markets and equity markets are open for business, but it will take better preparation than in the past to get through the loan committee and get your loan approved.

If you need to look at alternatives, raise some capital or replace debt, please give ClearRidge a call and we would be happy to talk through your options with you.

Tax Credits

If you would like to learn about business incentives and tax credits that may be available for your business, you may find the following useful:

www.clearridgecapital.com/taxcreditsoklahoma.htm

Pepperdine Survey

Download a PDF of the full Private Capital Markets report from Pepperdine's website:

http://bschool.pepperdine.edu/research/pcmsurvey/form/

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.

ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.