Have you heard the news? It’s a borrower’s market. That’s great news for companies looking to grow through mergers, acquisitions or leveraged buyouts. And lenders are on the hunt for new opportunities worthy of their cash.
While many businesses sat patiently through the past few years to ride out the sluggish economy, many are now prepared to pull the trigger on their growth plans. Capital is the key to turning these plans into reality, with many businesses looking to the syndicated loan market to finance acquisitions or to pay down more expensive debt.
Overall, syndicated loan volume grew 24 percent from $1.02 trillion in 1999 to 1.35 trillion in 2004, according to Loan Pricing Corp. Mid-sized companies — defined as $20 million to $500 in annual revenue — accounted for $168 billion of syndicated loans in 2004, compared to $107 billion the prior year.
Why a syndicated loan?
Lenders — both banks and institutional providers — tightened their belts for a couple of years, scrutinizing deals to minimize their risk or exposure. While lenders today may be cash-heavy, they are not looking to throw cash at every deal that crosses their desks. Lenders today may be reluctant to hold large amounts of debt from a single corporate customer, opting instead to take a piece of the deal and syndicating the remainder to other banks or institutional lenders. This strategy spreads the risk or exposure among multiple lenders. As the borrower, you benefit by increasing your borrowing capacity with multiple credit providers. And there are additional benefits.
- Less-expensive financing than bonds — lower interest rates and upfront costs
- Prepayment may be available without penalty or premium
- Expanded access to noncredit products such as capital markets solutions and expertise
- Short-term loans, traditionally up to five years
- Reliance on any one lender is reduced with multiple providers
- Competitive pressure often results in more market-driven structures and price
Getting started
James Florczak, treasurer of Arch Coal Inc., once compared the loan syndication process to buying a new car. You know you really need do to it; you are really excited about getting the deal done; but the process … well! Coming into the process prepared and educated can really be an advantage. First, you need to get yourself an agent bank. Sometimes referred to as the lead arranger, your agent will structure the deal, arrange and manage your loan. The agent is responsible for shopping around your deal to other banks or institutions, and tracking payments and other administrative responsibilities. Like Hollywood agents, your agent bank is paid a fee for this service based on multiple factors.
- Size of the financing
- Complexity of the financing
- Your company’s credit risk rating
- Underwritten vs. arranged structured
If the credit facility is underwritten, your agent commits (subject to certain conditions) to fund the entire amount of the financing if it does not find other lenders to provide a portion of the financing. If arranged, sometimes called the best-efforts option, your agent commits an amount less than the full amount of the financing and then markets the remainder to other lenders.
If this is your first loan syndication, meet with several different lenders and request a work up of the numbers in the form of a term sheet. Your agent bank should evaluate your financial needs over the next three to five years, not just the financing for your current project. And, be sure to inquire about the banks’ track records before awarding your business.
From start to finish, you can expect the loan syndication process to take, on average, eight to 10 weeks. Discuss all of your options with your financial advisor as you embark on the new adventure of the loan syndication process.
This was prepared for general information purposes only and is not intended as specific advice or recommendations. Any reliance upon this information is solely and exclusively at your own risk.
Ben Willingham is senior vice president and sales manager for Corporate Banking in Ohio at PNC Bank, National Association, member of The PNC Financial Services Group Inc. Reach Willingham at (513) 651-7558.
