Choosing the Right Loan Structure — In a Borrower’s Market
Wells Fargo Capital Finance’s Barry Bobrow writes to the CFO to explain the benefits of stepping outside the traditional loan structure and into an asset-based facility. Using some case studies as an example, Bobrow is able to highlight why choosing an ABL structure better fits the needs of certain borrowers in an ever evolving market.
Ask chief financial officers what they want most from their banks from a credit perspective, and they will probably tell you they want them to provide their company with significant commitments of long-term liquidity at an economical cost. If it is CFOs of a company with a leveraged balance sheet, they will likely add that they need the capital to be patient with respect to the inevitable business cycles, and that they need their banks to allow the company to execute its business plan without the need to constantly modify the core credit facility.
CFOs also often express the desire to maintain access to the credit markets without excessive concern for the risks presented by market volatility. Finally, they might add that they want their bank credit facilities to be coordinated with the other debt in their capital structure so that there is alignment of needs and actions from all of their creditors across a wide range of potential operating scenarios.
When the same CFOs are asked about the potential uses of an asset-based credit facility, some may say that they would prefer a traditional bank facility, provided by their relationship lenders. They may voice concern for the reporting requirements and the potential for onerous documentation. Leveraged borrowers have been taking advantage of the substantial liquidity in the credit markets, loading up on high yield bonds and covenant-lite institutional term loans in record amounts, but many remain frustrated by their inability to access large revolving credit facilities with their core banks and investment banks.
What these financial officers may not know is that their needs are often best served with an asset-based facility, as it is the tool that best meets their financial objectives and offers them the greatest liquidity pool. They may not realize that their relationship lenders actually prefer to provide the deep liquidity and patient capital they are asking for if the credit facility is structured as an asset-based loan. For companies with leveraged balance sheets and significant current asset levels, asset-based loans are often the single best source of the high levels of the flexible revolving loans they are looking for, and that these facilities give them a capital structure that is best suited to their overall needs.
The Syndicated Asset-Based Market
The focus of asset-based market participants on hard asset levels versus cash flow has resulted in a remarkably stable market across a wide range of market conditions. The market for syndicated asset-based loans has ranged between $75 billion and $100 billion per year over the past decade, and remained strong during the market disruption of 2008-2010, even when other credit markets were nearly shut down.
Pricing has also been significantly less volatile than in other credit markets, operating within a band of approximately 200 basis points (bps) from peak to trough, a fraction of the volatility experienced in other debt markets. Typical market pricing today of LIBOR plus 150-250 bps is much less expensive than the comparable pricing for similarly rated companies in the cash-flow market. The asset-based market has been highly flexible in terms of transaction purpose, playing a key role in leveraged buyouts (LBOs) in their heyday of 2005-2008, and providing a stable source of capital as companies focused on refinancing and lengthening maturities post the market correction.
The hallmark of the syndicated asset-based market has been the ability to arrange significant levels of liquidity facilities with highly flexible covenant structures. Most transactions have only one financial covenant, and it is only measured when liquidity falls below a defined trigger level of 10% to 15% of the facility. This covenant structure provides a company with access to its revolver regardless of its financial performance as long as it can remain above the trigger level. Over the past several years, the combination of an asset-based revolver and either a high yield bond or an institutional term loan has resulted in dozens of companies with a capital structure that has limited or no amortization, and no maintenance financial covenants. The market for these combination facilities is very well established, leading to a standardized set of documentation.
Wide Range of Issuers
The applicability of asset-based loans has varied widely. While asset-based loans continue to play an important role in restructurings and bankruptcy financings, companies seeking acquisition financing have also found these structures to be extremely cost effective and flexible.
In November 2013, Spartan Stores merged with the Nash Finch Company in an all-stock transaction valued at $1.3 billion. The merger created SpartanNash, a diversified food distributor with wholesale, retail and military distribution divisions generating pro forma annual sales of $7.8 billion. According to SpartanNash CFO David Staples, an integral piece of the deal was a $1 billion asset-based revolving loan facility that was used to pay off the debt from both companies. “Paying off debt while providing substantial capacity for future transactions was a critical objective for both sides of the merger,” Staples says. “We asked our banks to figure out a financial package that could get the money necessary for the deal with high certainty at an economical cost so we could avoid the expense and time commitment of launching high-yield financing.”
Platinum Equity Partners also utilized an asset-based facility when it acquired the Volvo Rents division of Volvo AB for $1.1 billion in early 2014. The capital structure included a $475 million asset-based revolver and $760 million in senior secured notes. Kevin P. Smith, head of Debt Capital Markets at Platinum Equity, said recently, “The asset-based market met our needs perfectly, allowing us to tap our relationship lenders for a deep pool of revolving loan capacity, which perfectly complimented the rest of our capital structure at a very attractive cost. We were able to arrange the facility quickly to allow us to complete the acquisition on our schedule.”
Asset-based facilities have also allowed companies to increase their revolving loan capacity, even if their assets are not all located within the U.S. In 2013 Novelis Inc., a global provider of flat rolled aluminum, headquartered in Atlanta, GA, arranged a $1 billion asset-based credit facility, which incorporated assets in North America, United Kingdom, Switzerland and Germany. According to the treasurer of Novelis, Randy Miller, “The ability of the asset-based structure to accommodate our needs in Europe, as well as the U.S., was extremely helpful to us as we looked to continue growing our global business. The covenant structure was well suited to our business and gave us flexibility across the business cycle.”
A Traditional Market Continues to Evolve
As credit markets have evolved, so has the asset-based market. Market participants have learned how to play a complimentary role to other credit markets to better serve their customer’s needs. Over the past several years the banks that are active in the asset-based market have generally increased their hold levels to accommodate their borrower’s growing credit needs, which have significantly grown market capacity. Today the asset-based market can provide for the needs of companies from the millions to the billions. This flexibility has assured an important role for asset-based lending in the credit structures of leveraged companies now and in the future.
Barry Bobrow, managing director, is the head of Loan Sales and Syndications for Wells Fargo Capital Finance. Bobrow has been with Wells Fargo since 2004. Prior to that, he was a managing director at Banc of America Securities, where over an 18-year career his assignments included team leader for middle market leveraged finance, head of European loan syndication and syndicate manager for asset-based lending. Bobrow is a member of the Executive Committee of the Commercial Finance Association, and a past member of the Board of Directors of the Loan Syndication and Trading Association. Bobrow holds an MBA and a B.A. in economics, both from the University of Michigan.