If your growing company is anticipating a important milestone on the horizon, such as an acquisition or a significant capital investment, you may benefit from a certain kind of syndicated loan. Though the larger syndicated loan market has been somewhat restricted by the credit crisis of the past two years, companies still may have the opportunity to tap into a current trend toward mid-sized "club" loans as an important source of capital for major financial events.
Your company's banker may recommend a syndicated financing when the amount you need to borrow exceeds the amount a single bank feels comfortable lending compared to the company's size or the risk of the transaction. Typically, individual lenders are reluctant to approve very large commitments of credit to a single borrower, especially in riskier situations. In these cases, it is possible for the bank to bring together a small group of banks or finance companies to secure a deal that meets the borrower's needs.
As a recent example, in August 2009 Silicon Valley Bank arranged a multi-bank financing for NetLogic Microsystems, Inc., a fabless semiconductor company in Mountain View, Ca. The company had bid to acquire a product line from Integrated Device Technologies, and it sought financing to support its working capital and business needs. Working to assemble a group of banks, Silicon Valley Bank structured and priced a loan for market conditions, negotiated the agreement, and administered the transaction on behalf of NetLogic, which ultimately was able to secure $55 million in acquisition financing.
How syndicated loans work
Since the late 1970's, syndication of larger loans among commercial banks has played a major role in financing large and middle market corporations. These credit facilities were often used to finance the leveraged buyout booms of the 1980s and mid-2000s. In recent years, as the market grew, collateralized loan obligations (CLOs) and other institutional (i.e. non-bank) investors formed the majority of capital provided to a rapidly expanding market. Large commercial and investment banks underwrote billions of dollars of credit that was sold to these investors. With the dramatic upheaval in broader capital markets over the past 18 months, many investors have exited the market, and large syndicated loans are substantially less prevalent.
Instead, unlike the large, capital markets-driven transactions described above, "club" deals, providing $25 million to $100 million, but sometimes as much as $150 million from a group of relationship lenders, have become the new normal.
Here's how club deals often work:
A company approaches its banking partner to discuss options for a future financial event, such as an acquisition. From this discussion a loan structure and general pricing parameters are created.
The bank, which is known as the "arranger" in the syndicated deal, will put informal feelers out to potential deal participants to test its structure and pricing parameters to ensure the deal will meet terms the market demands.
Based on the feedback received, the arranger will issue a term sheet to the company and then begin sending out a private information memorandum (IM) containing an overview of the transaction, key financials, terms of the credit and background about the company and industry. This is the formal solicitation of the deal to potential investors. The arranger may also coordinate a meeting for potential bank participants with the company so that questions can be answered in a single forum to efficiently use company management's time.
Once the arranger has put together a group of lenders (usually between two and six banks or finance companies), it negotiates the loan agreement, assists banks in understanding the company's business and coordinates information gathering and communications among the involved parties.
Having an arranger put together a syndicated loan deal eases the administrative burden on companies that would otherwise have to reach out to many different lenders and go through multiple credit application processes. Syndicated loans also benefit companies and lenders by allowing them to build relationships for the future as a company grows and its needs expand and change. Exploring the possibilities
One of the keys to success with syndicated loans is that all participating lenders must understand your business and be knowledgeable about the industry or sector in which you operate. With that in mind, it is important to work with a banking partner that knows you well, can advise you on how to structure your financing and can find the right investors to participate in a club deal if that fits your specific needs.
Because these kinds of loans can often take extra time to complete, you should consider talking to your banker early if a major financial event or need is around the corner for your company. Your banker can counsel you on the best approach and begin exploring possibilities for club financing that will help your company get to the next level.
For more information about syndicated loans, contact SVB's established companies services team.