JD’s Lending No-No’s #2 and #3

by Johnny Debacle

Read JD’s Lending No-No’s #1a and #1b. The focus today is on what can be gleaned from a lender presentation.

Lending No-No #2a: Don’t loan to companies who will need to control costs, if they have no connection to actual real world cost controlling.


  • I was recently in an Italian city for a meeting. The company I was there to see indicated that the best way from the Aeroporto to the meeting was by taxi, so I trusted them and took a taxi. It was €80. I later found out that there was a €5 shuttle express that would have taken me with half a km of the meeting and would have taken about 10 minutes more. These are the people charged with cutting costs in a large industrial company that operates in a cyclical sector that saw several competitors file for bankruptcy only a few years ago.
  • A steering committee is generally a group of lenders from within the overall lender group picked to direct the bankruptcy process. Senior management will meet with the committee and usually a couple of third party financial consultants. A US based manufacturing company that filed for Chapter 11 several years ago held their steering committee meetings in a rented room within the most expensive law firm real estate in the world. The food was luxuriously catered, while the excessively compensated senior management laid out their plan to cut costs by cracking the union, shuttering plants and laying off thousands of workers. I think we consumed the equivalent of 3-4 salaried employees during that meeting alone (and they were delicious)!
  • Lending No-No #2b: Never loan to an industrial or manufacturing company, if the tchotchke they give you at a meeting immediately breaks in your hand.


    At the meeting up above, I picked up the complimentary pen included with the presentation. I tried to click it on which resulted in my catapulting the clicky part into the Brooks Brother suit in front of me. It didn’t even last a single usage. If a company can’t even make a workable clicky pen, who says they can produce products out of chemically enhanced ceramic polymers?

    Lending No-No #3: Don’t invest any confidence in management’s projections. Management’s projections are very useful….for me to poop on.


    Every company has the same guidance: 8.9% CAGR revenue growth for 5 years, steadily improving margins and working capital which is so smooth, you might actually try and eat it thinking that it was Accrued Liabilities flavored gelato. They are all bunk. About the only use a lender should have for projections is as a gauge of management’s hubris.

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