The availability of senior and subordinated debt, or the lack thereof, is a critical ingredient in the outlook for any industry. We’ve begun to see signs that the ability of door and window manufacturers to attract debt capital is improving. When the U.S. was still in the grips of the housing freefall, many capital providers excluded building products companies from consideration. Now, however, some capital providers could be compared to a youngster approaching the high diving board for the first time – they make it all the way to the end and then turn around. These are the debt providers that look at a transaction and then politely decline for a reason that was mentioned in the initial one-page description of the company.

Other groups, though, take the more optimistic (and, I feel, more realistic) view that the recovery is beginning. The commercial sector is under pressure, but the recovery on the residential side will help pull the commercial side through the challenging period ahead. In general, the point of view of debt providers willing to make a bet on building products companies is that they don’t have to pick the bottom with a margin of error of less than six months. It’s not known whether companies in this sector may have another six months of belt tightening ahead of them. However, investing a little too soon won’t have any impact on the rate of return that can be made in backing a strong and growing company in an industry in which an overall recovery is underway.

There are a range of characteristics that lenders seek in the current market. The first line of defense is a careful analysis of the quality of the receivables. With regard to fixed assets, equipment will receive the lowest valuation, because of the amount of equipment currently available on the secondary market. As for land and buildings, a sign of the times is the unwillingness of banks to accept an appraisal that is more than a few months old. After the sufficiency of collateral is confirmed, lenders turn their attention to the cash flow out of which they will be paid. It is best if a company seeking debt can demonstrate their ability to pay the interest and principal on the debt in their current state and the fact that their cash flows can be expected to increase over time.

Dialing all of this in, we find ourselves at a crossroads where strong companies with good management, a growth story and a compilation of strong assets should be able to attract debt capital. In this market, such access to capital will separate the have’s from the have not’s when it comes to plant expansions and company acquisitions.

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