"Good day, Eeyore," says Pooh. "At least we haven't had an earthquake," Eeyore replies.

That's the mindset of many banks these days. There isn't a lot of lending going on, but at least the financial system didn't collapse. And at some point, better days will return.

Just when is hard to pin down. At various meetings over the past several months, we've noted that credit conditions are improving but remain tight. In response to the recent past-and their own pinched balance sheets-lenders are often raising lending standards, increasing the interest-rate spread, lowering risk ratios, adding covenants, even demanding personal guarantees. They are looking for customers with good collateral, cash flow, character, and a sound balance sheet.

On the resort side, to improve their appeal to lenders, resorts are "cleaning up" their operations and cutting expenses to improve cash flow. They are also taking another look at their business plans-which double as a sales pitch-especially when approaching new lenders.

The weakness in banking is also leading resorts to seek out alternative sources of funds: REITs had their third-best year ever in 2009, and are (relatively) flush with cash. Private capital and vendor financing are other options.

BANK WORLD OVERVIEW

To understand the current climate, SAM interviewed industry and banking experts and attended the banking roundtable discussion at the NSAA convention. Most told a similar story.

Gardiner de Back, a senior VP with Wells Fargo, told us that the largest banks are again looking to lend. He notes that Wells Fargo has not changed its lending standards in 30 years, and said that plenty of capital was available. But in a Catch-22, weakness in the economy makes it more difficult for some borrowers to meet these standards. Still, he notes, there are many areas that are not highly leveraged, and that makes them attractive clients. "Sound, appropriately-leveraged operations will find banks willing to do deals," he says.

In general, he says, "I don't look at the ski business any differently than others. We are looking for investments that are accretive. For example, snowmaking is a form of insurance, and it also is accretive if it's more efficient and cuts costs."

John Marian of Fifth Third Bank says that regional banks have also rebuilt their balance sheets, but they are still being cautious. Most are lending only to their best customers, Marian says. Many have raised their standards, and they have increased the spread, too.

That's not the half of it. "You can hardly get a loan without a personal guarantee unless you are very, very big," says Steve Rice, CNL Lifestyle Company VP and managing director. "Resort operators for years have had lines of credit or been able to collateralize a loan with what they're installing on the hill. That's not enough any more. Personal guarantees are an indication of how skittish and and tough and skeptical and tight the market has become."

Worse, he adds, "the loan to value ratio is really coming down. We see players, strong ones, try to get financing, and offers are coming back well below 50 percent, in some cases 30 percent of the value of the asset." And appraisals are turning conservative as well. "That's tough when you are used to a lot more cooperation from the banks," he says. Matt Jones, CFO for the Aspen Skiing Co., agrees; he's seeing loan to equity ratios in the 40 to 50 percent range.

Real estate is especially taboo at regional banks. While TARP (Troubled Asset Relief Program) helped the banks recover in 2009, they still have a great deal of commercial real estate exposure, and that limits their ability to lend. They don't have much cushion. As has been widely reported, a great number of commercial loans will be coming due between 2012 and 2014. What happens when it comes time to roll them over? Many projects have too little equity to meet current, tightened standards, and rates will likely be higher. In addition, there will be less capital available.

Overall, it's likely that there won't be enough capital available to refinance it all. Some projects will inevitably fail. The consensus advice: if you have a collateralized mortgage-backed security, renegotiate it. Now. If not now, then as close to now as possible.

For many, local banks may hold the greatest promise. Community banks will continue to loan if they have the capital; there's big profit potential given the current spread. Both Tammie Quinlan, VP and CFO of CNL, and Roland Andreasson, CFO for Boyne Resorts, urge resorts to find local banks that want resorts' business. Local banks-or any banks, for that matter-with less leverage than some of the larger banks have not been as impacted as severely. Quinlan points out that local banks understand the local economy and may have good knowledge of your business.

But even so, some small banks have tightened up, too. Regulators are being more diligent, future regulations will be more stringent, and those two factors will impact all banks.

Given these harsh realities, there are several steps resorts can take to improve their chances of finding capital when they need it.

WANTED: CLEAN SHEETS

Resort CFOs and lenders agree: it all starts with the balance sheet. Before you can go looking for cash, you have to run a tight ship-and prove it. Positive cash flow, low debt and solid equity in the resort reduce a banker's risk in your enterprise.

With banks focusing on reducing risk, it's essential that resorts manage costs. Betsy Cole, CFO of Booth Creek, advises resorts to build budgets to the cost structure-so that the resort can have cash flow even in a bad year. Start lean, then staff up, based on line-based budgeting. Forecast staff needs three to four days in advance, and then staff daily to need. It might cost you more on peak days, she says, but it saves overall.

"What matters is not just cutting five percent and tightening your belt," says Rice. "The question is, how do you really do business differently? We've seen with our resorts that you can make major moves without throwing your business under the bus. You can lower the cost and produce a better experience."

"Resorts need better management structures, better organizations, faster reaction, fewer meetings," adds well-traveled resort consultant Roger McCarthy. "I've been in resorts where there'd be meetings every week, with 40 managers in a room. If you've got that many managers, you have at least one layer too many. If you have more than five, take a hard look at how many layers you've got.

"The investment side, for me, comes out of cost reduction. And the cost side is the one you can control. When you control that, then you've got some cash. And then you can go invest."

Showing that you can make money in a tough environment goes a long way, but there's another key step: preparing an effective business plan. "A good business plan is even more important than ever," says Aspen's Jones. "You need to show where you've been, where you are, where you're going." Adds Andreasson: "You have to explain why you think that what you're doing is right." All agree that it's not enough to have a sound balance sheet; you must have a good story about your resort as well. Obtaining a loan requires salesmanship; the business plan is exhibit A. It's extremely important to "tell your story right," as one expert said.

Finally, character matters, bankers say. "The most important thing is the people behind the deal," says de Back. "Do they have the experience, are they committed to the business? We've done deals that we wouldn't have done but for the people behind them, the owners and the management."

DIVERSIFICATION

And that point leads to the next step: cultivate multiple sources of funding. Bank consolidation will continue. Ten years ago, there were 12,000 banks; that number has shrunk to 6,000, Marian notes. "As banks merge, sell out, and go out of business, you need more relationships and strong lines of communication, including multiple contacts at each financial institution. That way, if someone leaves or is downsized, you still have a contact there," he says.

Whether dealing with an existing banker or a new one, it pays to educate your lenders as much as possible.

"Invite them out over the Christmas holiday or President's week," says Rice. "As times return to normalcy, some of the investment you make in building relationships will pay off.

"Unfortunately, bankers don't understand our seasonality. They think that you're dependent on snow, and if you have a bad snow year, you're in the tank. We all know that's not true. The East has many resorts with 100 percent snowmaking, or nearly so, and the ability to perform in even marginal years is proven."

"At the moment, the ski industry is being thrown into the pot with a hotel in the Bahamas, and they are so different," adds McCarthy. "We're seeing that the drive-to markets have remained strong, and the big destination resorts did peaks as big as they've ever done. Places like Breckenridge hammered it out of the park in an El Nino year." This is the type of educational material bankers need.

FINANCING WITH REITS

But what if bank lending remains tight? "There are lots of sources aside from banks," says George Lake, CFO of Triple Peaks. "People want bigger returns than they can get with Treasury securities."

One obvious source: REITs. Quinlan acknowledges that CNL slowed its activity during 2008, but 2009 was the third-best year ever for REITs, she notes, and CNL currently has $5 billion in the pipeline.

"Our money comes from individuals, primarily," adds Rice. "We have a steady stream of investors. They are looking for long term return, which we provide-we are paying 6.25 percent and will continue to do that. We're less than 40 percent leveraged, so we are very conservative. Not to sound too self-serving, but there are 14 resorts that have taken advantage of what we have to offer. We can purchase a resort, lease it back to an operating company and be a source of capital for expansion or maintenance."
Quinlan cautions, "we've taken our returns up, and that increases the hurdles-CNL's hurdles are higher, too."

VENDOR FINANCING

Vendors are another source of funding. "The reality is that there's going to be more vendor financing. . .there needs to be more of it," says Rice. "There are ski hardgoods manufacturers who provide dating programs that allow resorts (and shops) to work through the cycles of their year. There have been lift manufacturers that have done it to some extent. Certainly for snowcats you've seen that type of program. You're going to see resort owners increasingly approach vendors about programs, because the traditional sources are more problematic."

Robin Smith of SnoConsult sees this happening increasingly in snowmaking, too. "The only appetite I see is for expansion that will lower a resort's operating cost. There are viable operating companies out there that were never based on the real estate model." To take advantage of automated systems, though, they may have to find a partner-like a vendor, say.

For example, a resort might have six or seven trails that it would like to automate. It can automate one or two trails every year out of cash flow. But it might take seven years to finish 100 percent automation of the ski area. And many of the savings don't accrue until you're at 100 percent.

"Where does the money come from?" Smith asks. The answer: a vendor.

"For example," Smith continues, "if you want a batch of HKD guns, the list price might be $4,100. If you came with cash in hand, you might be able to buy them for $3,300. Or perhaps you could pay the $4,100 over time, a third of it each year. You get the guns now and start saving money today. Certainly there are companies that will do that." Smith mentioned SMI as having the capability of funding one project a year at $1 million.

Performance contracting is another possibility, Smith says. "Outside the ski business, for example, Johnson Controls has replaced vintage, dated HVAC systems in hospitals and government buildings, and installed new wiring and communications lines." The facility might budget $1 million a year for HVAC. The efficiencies of the new system "are great enough that Johnson can come in and, for that budgeted amount, install the gear and make their own loan payments over the next seven years and pay for the system and provide their profit," Smith says. So the hospital or hotel will have a steady line item, and has redone its entire HVAC and communications system, financed by the supplier."

If a resort were willing to commit to a set annual payment for snowmaking, a supplier could install a new, efficient system and pay for it out of the savings. But that would force an area to accept a production cap based on its past levels. Smith believes that many resorts would consider that a big gamble. But it's an option.

PRIVATE CAPITAL

Private capital is another financing alternative. In the winter sports business, one such player is International Financial Services Corp., a 30-year-old company that has been in winter sports about five years. IFS finances mostly "above ground" equipment, through both loans and lease agreements.

"The main reason people come to us rather than a bank is that we preserve their liquidity," says Bob Seeds, IFS president. For example, he says, "In the previous five years, a resort might have had a $3 million line of credit. They maybe used $2 million to buy equipment, and $1 million for working capital. But then maybe the bank cut the line of credit," shrinking the area's working capital.

"People come to us so that they can keep their line of credit wide open. People are calling and saying, 'Our line of credit is occupied by equipment we purchased three years ago; I need working capital. Would you take these groomers and snowmaking equipment and computers, now on books for $900,000, off our line of credit?' We'll do a four- or five-year deal."

IFS, he says, has about $75 million to lend, with other portfolios it can tap, too. Most deals are fixed-rate, with 3- to 5-year terms, with rates related to the Treasury yield curve.

Again, IFS's familiarity with winter sports breeds confidence in the health of the business. "We realize skiing is a passion," Seeds says. "People will do without other things so that they can ski and ride." Plus, IFS has been in the agriculture business for decades, "so we understand seasonality," he adds.

Over the past five years, IFS has done an average of seven or eight deals a year, with resorts ranging from Jackson Hole to small Midwestern areas. Some have multiple loans; a few write multiple loans yearly.

The bottom line is, financing is not likely to return to "normal" for years. In the meantime, build a strong balance sheet, develop a business plan that tells a compelling story, diversify your sources of capital, and make a realistic long-range plan. These steps will take creativity, effort, and change. But they are far better than the alternative.