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CEO PROFILE: Chris Gorman, CEO Key Bank NA

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Chris Gorman, CEO Key Bank NA Chris Gorman, CEO Key Bank NA

Chris Gorman, CEO of Cleveland-based Key Bank NA, a major middle market bank, sat down with PRESIDENT&CEO founder Paul Stukel in late September for a discussion of the middle market from a banker’s perspective. From our December Issue.

PCEO: It appears that you’ve got a more optimistic outlook for middle market companies than most other folks.  Obviously we’re in a pretty tough time now, what with the Fed coming out last week with its comments about an extended period of stagnation, obviously the volatility in the markets, the turmoil in Europe – I guess everybody would be interested in knowing what the basis for your optimism is?

Gorman: Clearly the risks and the negative news increased last week, so, clearly, for all of our clients there’s a continual stream of challenging news, with Europe, which obviously doesn’t look like it’s going away anytime soon; with the budget negotiations, discussions that I believe will be recurring; the Fed last week, doing exactly what they said they were going to do, but as you note there was some language in their announcement that caused people to have additional levels of concern. 

Having said that, when I’m out talking to all of our clients, I’ll make the following general observations:

First, our clients expect sales this year to increase over last year, although not at as great a rate as in previous years.

Second, our clients, in general, have not seen orders being cancelled.  Some are starting to see orders being pushed out, which is obviously a leading indicator.

Finally, our clients continue to proceed with their capital expenditures, which is another telltale sign.

So, based on that, I’m still optimistic on where our clients are going. But clearly, the challenges have gotten greater just in the last week.

PCEO: Is there something unique about middle market companies that suggests that they’ll have a better time weathering these types of storms than their counterparts?

Gorman: Well, one thing that’s a little different about the middle market is the way they’re funded, which, by definition, has less volatility.  For instance, right now the institutional debt market is basically in a price discovery mode.  However, when you look at the pro rata market, where basically we underwrite bank debt that is sold to other banks, that market is much more stable and less volatile.  So there are a few things going for middle market companies, one of which is that right now they typically access their senior debt from banks, and the bank-provided capital has proved to be more stable, less volatile.

PCEO: You have indicated that, at least from what you’re seeing, middle market companies are not stopping their capital expenditures, they’re still producing and tend to think that they’re going to have higher sales. Is there an increased appetite for credit from these customers at this stage of the game, or are they kind of sitting on the sidelines waiting to see how things shake out?

Gorman: You know what’s interesting?  We have not seen any increase in our line utilization.  What we are seeing is our client borrowing more for either specific capital expenditures or specific strategic initiatives, but we’re not seeing any increase in line utilization.

PCEO: Are there any specific sectors of the middle market that you’re more bullish on?

Gorman: Clearly, as we look at our portfolio, the companies that came out of the financial crisis the earliest and have had the greatest trajectory to date have been those  companies that export a significant amount of their product.  Our clients that have experienced the most success over the last, call it, 18 months have been those that have, obviously, a proprietary product, but are also selling it into a global market where there are some markets that have been growing at greater rates than the domestic market.

PCEO: You’ve suggested that there will be a pretty hot market for M&A in the middle market in 2012, primarily as a result of PEGs executing their exit plans.

Gorman: I think the uncertainty that you referenced earlier in our conversation is going to push out some of the M&A activity that I would have thought would hit in early or mid-2012 to later in 2012 or early 2013.  Just as you’re asking questions about which way the economy is going, I think people are generally trying to gauge where things are going.  I do think that once the markets stabilize, specifically the financing markets, I think there will be a whole lot of M&A activity, partly because of the pent-up desire of people who, for one reason or another, are seeking liquidity – those people, who were looking for a deal in either late 2011 or early 2012, they won’t go away, they’ll just be deferred until late 2012 or early 2013.  The other thing is that, if you look at a scenario where we’re looking at relatively low growth, that means that if you’re going to grow at healthy rates you’re probably going to need to augment organic growth with external growth.

 

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