Dennis Rusconi has been in the mergers and acquisition business at the Rusconi Co. in Hartford for 23 years.
Perched behind the desk of his office at CityPlace II, which overlooks Bushnell Park and the golden cap of the state Capitol, Rusconi has been able to orchestrate a myriad of deals over the years for midsize companies whose needs weren’t being met by the large investment banks on Wall Street.
His specialty: corporate finance deals with closely held or family owned companies with annual sales ranging between $2 million and $50 million in the manufacturing, technology, retail and service sectors.
But business has gotten a lot tougher lately.
For example, he recently represented a client who tried to purchase a service business in North Carolina. To close the deal Rusconi needed to find a lender willing to make a $2 million uncollateralized loan.
Such loans are a form of debt financing in which a lender funds against the borrowing company’s cash flow.
Cash flow loans have commonly been used for mergers and acquisitions or to fund new growth ventures by emerging companies. They’ve also provided a source of working capital that businesses, especially startups, use for expansion or to meet seasonal-demand changes.
After meeting with a half dozen banks recently, including Bank of America, Citizens Bank, People’s Bank, Wells Fargo and JP Morgan Chase, it became apparent to Rusconi that getting the money wouldn’t be possible.
“Banks won’t do cash-flow loans. They won’t even forward you a dime,” Rusconi said.
The deal fell through.
As turmoil on Wall Street continues to shake up the banking and credit industries, lending standards keep tightening. The market for uncollateralized loans has virtually evaporated because of the great risks they pose to banks.
Generally, when banks make loans to businesses, they demand collateral in the form of specific assets as a guarantee of repayment. But cash-flow loans rely on a business’ ability to generate revenue, so if a company’s revenue dries up, cash flow lenders are out of luck.
Prior to the outbreak of the credit crunch, banks were much freer with issuing such loans, Rusconi said.
“Before the crisis started they were doing deals that would make your eyes pop,” Rusconi said.
But now banks have become increasingly reluctant to take that risk.
“They already have enough risk in their portfolio so they don’t want to take on anymore,” Rusconi said. “Any business that is trying to grow is going to have trouble. Mergers and acquisitions are also very slow right now.”
Kevin Flaherty, market president for Sovereign Bank in Connecticut, agreed. “It’s not something banks like to do. It’s always been frowned upon,” he said.
As banks become less of an option for cash-flow loans, many companies are being forced to turn to private equity firms. But they charge much higher interest rates than banks.
Sometimes referred to as “legalized loan sharks” within the financial services industry, many private equity firms charge between 10 to 15 percent interest, plus they also get a stake in a borrower’s equity.
“In the end, their rate of return can be as much as 20 to 40 percent,” Rusconi said. “They can get away with it right now because credit isn’t available.”
After several banks rejected Rusconi’s appeal for the $2 million cash flow loan, he pursued private equity firms. However, their rates were so outrageous that his client walked away from the deal.
But there may be help on the horizon.
Rusconi said talks of a new government program to take over troubled mortgage assets from financial institutions could help banks lend more freely again.
The Hartford Adds A Director
The Hartford Financial Services Group has expanded its board of directors from 10 to 11 positions and elected Robert B. Allardice III to fill the new vacancy.
Allardice is a retired board member of Bankers Trust Co., Carlyle Capital Corp. Ltd., Deutsche Bank Americas Holding Corp. and Worldwide Excellerated Leasing Limited.
His financial services career began at Morgan Stanley & Co. Inc., where he spent nearly 20 years.
He founded the company’s merger arbitrage department and later became chief operating officer of the equity department.
He also worked at Smith Barney.
Greg Bordonaro is a Hartford Business Journal staff writer.
