Restructuring Working Capital: A Critical Component of the Surety Analysis

Process
By Bill Reidinger

For construction executives charged with managing the surety relationship for their firm, the importance
of the analyzed working capital position relative to the companys backlog is likely very clear.
Surety underwriters are focused on this balance sheet measurement. Many sureties value this ratio more
than equity as a key metric in evaluating the maximum aggregate levels of surety credit provided. In an
expanding construction economy, the working capital analysis can mean the difference in obtaining the
surety bond needed to land that next big project.
The evaluation of working capital by a surety underwriter is generally current assets minus current
liabilities. However, it is important to keep in mind that additional reductions are likely from that number.
Assets such as prepaid expenses, employee or shareholder advances, related company loans and older
trade receivables will all be eliminated by the underwriter in his analysis. Additional partial discounts for
inventories are also likely. At the end of the analysis process, the working capital position may look very
different from where it started. Also, keep in mind that unused availability on a company revolver is not
considered working capital by the surety.

Working capital can be managed through proper financial management and cooperation with a firms
financial partners. Here, two opportunities exist:
The first is to arrange for debt, which is categorized as a current liability (meaning it will come due inside
of 12 months) to be termed out for a period of three to five years. This will reduce the level of current
liabilities and in turn increase the working capital position.
The second opportunity is through the use of a new term loan. Again, using the three- to five-year time
frame, the loan will generate cash that will increase current assets without an offsetting increase in current
liabilities. In either case, the suretys analysis of working capital is increased. If this is the limiting metric
for surety credit, the problem may be solved.
As mentioned, this concept typically requires a strong and cooperative banking relationship. Additionally,
it is important that the lending institution have proper collateral for the longer term loans. In many cases,
this takes the shape of over-depreciated fixed assets or corporate real estate that can be leveraged beyond
their present levels. In other cases, related company guarantees or a strong personal asset portfolio can be
used to collateralize these long-term obligations. It is vital to ensure that communication is open between
the parties involved. The bank should understand the motivation behind this financial restructuring and
the benefit that it brings to the firm.
Further, it is important to discuss these moves with the surety underwriter before making any decisions.
The surety will provide feedback on whether this working capital adjustment accomplishes all that is
needed to qualify for a large single bond or aggregate support. The working capital position might be only
one of several limiting factors in the evaluation. There may be a need to provide a pro forma balance
sheet that presents the financial picture after the restructuring. This helps the underwriter visualize the
analysis, which will go a long way in helping them understand it. Open, two-way communication will be
the key to getting buy-in from all parties and knowing the outcome before making these new financial
commitments.

When restructuring, evaluate the realistic outcome of the final objective. In most cases, it is the potential
gross profit of that larger, bonded project or increased sale volume. Ask:
Does the outcome justify the work and possible additional cost to the company?
Can it expand what the company does for a key customer?
Does it elevate the company to a new level that allows it to bring in additional talent and expertise?
The residual benefits can be multiplicative.
At the end of the day, understand how the support of a surety partner elevates the company. If working
capital arises as a key component that limits support, remember that this is a manageable number. Explore
possible solutions and evaluate the benefits versus the costs. It might be the start of something really big.

Bill Reidinger
Bill Reidinger, a Senior Vice President and Surety Practice Leader at Assurance, specializes in the area of construction and
commercial surety products for mid-market to large cap companies. He has over 20 years of insurance and surety experience.
Bill graduated from Drake University with a Bachelor of Science in Business Administration degree and is a member of the
Construction Financial Management Association (CFMA).