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Negotiating the terms of loan documents
Often, the terms and conditions of credit facilities are rigid. Depending on the deal and the lender, our goal is to negotiate terms that limit the number of financial covenants our clients need to report on. It is not uncommon to negotiate as little as one or two financial covenants with our deals. We manage this by initially creating a competitive environment for the business with potential lenders during the Discussion Paper stage so that no surprises arise when a Term Sheet and/or Commitment Letters are delivered. If a lender is unwilling to limit the covenants at the outset of a deal, we always negotiate the terms under which covenants and any guarantees can be eliminated in the future.
With respect to personal guarantees, the size of a deal and the condition of a company are the significant factors as to whether a lender requests personals. As a general observation, the smaller the deal, the more likely it is that a lender will require personal guarantees because of the risk associated with lending to a smaller company. Larger deals are more balance sheet exercises and lenders base their decisions on the merits of a deal and balance sheet. The objective is to eliminate, and if that is not possible, to mitigate, the extent of personal guarantees. The best approach is to have a partner with market and negotiating experience in this area, which is where Link Resource Partners comes in.
Arranging Inter-Creditor Agreements and Spreading Risk
Due to lending specialization and risk appetite, we often parcel out a credit facility to different lenders. For example, one lender may want to provide senior debt but does not want the equipment financing. Conversely, we may suggest breaking up a credit facility to prevent one lender having leverage over all the assets of the business. A cost and risk analysis is usually performed to determine the best manner in which to compartmentalize borrowing needs and simplify the process.
Since many of the financing assignments we work on involve arranging multiple credit facilities from multiple sources, we have the level of expertise required to navigate through this process. Working through the numerous inter creditor agreements such as postponements, subordinations, and standstill agreements, while maintaining the best interests of the client, is complex and requires an experienced advocate operating on your behalf. Our ability to act as the intermediary between lenders, and provide realistic options early in the process, prevents deals from breaking down when they are in the legal phase. The game plan that we choose at the beginning is clearly outlined to the lenders so that individual expectations are aligned with a master plan on how a deal will evolve.
Increasing Margin Availability and Improving
Working Capital
If your company is constantly at the edge of its line of credit’s margining limit, we will review the existing facility for new clients to determine whether there is more room to squeeze out working capital. While most have set margining policies, there are methods to help increase line availability that we can explore.
Balance Sheet Enhancement - Recapitalize and
Restructure
Most companies routinely go through the process of re-capitalization and restructuring. The condition of a company’s balance sheet is usually the prime indicator of a company’s health and dictates what financing instruments are available to it and what steps are required to streamline operations. Schedule “A” banks have well established lending criteria that can often act as barriers to entry for many clients. The tools we have at our disposal help convert marginal deals into conventional banking deals. How do we do this? By addressing balance sheet deficiencies and correcting operational inefficiencies.
Every business owner wants to secure the cheapest financing available to it. In order to do this, a file needs to be positioned and lenders targeted such that it hits their sweet spot. If a company’s debt to equity position is too high, or its current ratio coverage is to low, a common approach for us is to provide a pure equity solution or a mezzanine solution through our BCC fund, tailored so that the money invested is treated similar to equity. These potential injections are used in order to immediately address the covenant conditions most banks require to pursue a deal.
Further balance sheet solutions can also include arranging a sale and lease back of company assets so that the debt associated with those assets is removed from the balance sheet. While this may have a slightly negative effect on the income statement, the advantages outweigh the disadvantages, and help strengthen the financial position dictated by the balance sheet.
In conclusion, corporate finance is not an adjunct or bolt on professional service to your business; it is integral to your business. The business, its balance sheet, its income statement, its customers, and owner are dynamic to one another. We succeed in helping clients get more from the functional area of corporate finance not only because we are experienced in corporate finance, but because we are truly experts at understanding our client’s business. Through our services, together, we get the most from the dynamic relationship between your business and corporate finance.
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