Ben Willingham

Wednesday, 28 September 2005 11:36

Loan syndication

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.

Tuesday, 28 February 2006 11:07

Selecting the right money

Middle-market companies looking to borrow money are at a distinct advantage today, benefiting from unique financing options and a crowded field of lenders. You can choose from an array of financial solutions to finance improvements, expand inventory, purchase new equipment or facilitate a merger or acquisition. With the help of a financial professional, you can assess your needs and determine which of the following capital resources best match your company.

  • Senior debt vs. junior debt. Senior debt is debt that has priority of repayment in a liquidation, and, therefore, is usually lent at more competitive interest rates than junior debt.

Typically, 50 percent to 70 percent of a mid-sized company’s capital structure is senior debt. It can be extended on a secured or unsecured basis and may or may not carry the guarantee of the owner(s). Junior debt is either unsecured or has a lower priority or repayment on the same asset or property as senior debt.

  • Cash flow lending. Cash flow lending, a form of senior debt, is typically extended to companies that generate significant cash from operations each year, but may not possess a great deal of balance sheet assets, such as a service company.

The leveraged buyouts of the past have set the stage for this type of lending, where financial institutions may extend credit based on a multiple of a firm’s cash flow. For these purposes, cash flow is typically defined as the borrower’s earnings before interest, taxes, depreciation and amortization (EBITDA).

  • Asset-based lending. Asset-based lending, another form of senior debt, is a good choice for highly leveraged/undercapitalized companies, companies with seasonal revenue, or businesses that generate more working capital and assets than cash flow.

Many are surprised by the interest rates that are competitive with traditional business loans. Because this type of lending is based primarily on a company’s short-term assets, lenders can extend credit to businesses with higher-risk profiles.

  • Second-lien loans. Second-lien loans have emerged as a mainstream solution for growing companies needing liquidity. Favorable pricing, an active mergers and acquisition market and increased use of recapitalizations have fueled this increase. These loans are junior in collateral rights and have higher interest rates.

Companies use this option to bridge the financing gap between cash flow and equity, particularly following a merger, acquisition or recapitalization. Second- lien borrowing is also a way to monetize your investment in your company during strong economic times by cashing out, replacing equity or refinancing subordinate debt through a recapitalization.

  • Mezzanine loans. Used to finance a company’s expansion, an acquisition, a dividend payment or stock repurchase, a mezzanine loan typically is unsecured and considered junior debt with a longer payment term than other loans. Mezzanine loans are characterized by quick turnaround with minimal due diligence and little or no collateral. These loans are priced with the lender seeking an 18 percent to 22 percent return on its investment.

A typical structure would be a six-year loan with no principal payments until the maturity date, an interest rate of 12 percent and an equity interest to potentially yield the returns cited above.

  • Equity investments. Instead of a loan, you can raise money by selling common or preferred stock to individual investors. In return for this equity investment, your investors receive ownership interests in your business, such as shared profits, a seat on the board of directors and input into how your company operates.

To help you decide what financing best meets your needs, it is important to work with a lender who is willing to take the time to understand your business and has access to and experience in all available options. No matter which options you choose, working with a trusted business adviser can provide ideas, advice and solutions that can help your business achieve its goals.

This summary is not legal or financial advice, and does not purport to be comprehensive. Please consult your own adviser. Any reliance upon this information is solely and exclusively at your own risk.

Benjamin Willingham is senior vice president for corporate banking in Ohio for PNC Bank, National Association, member of The PNC Financial Services Group Inc. Reach him at (513) 651-7558.

Monday, 23 May 2005 12:18

Think cards first

Supply chain management technology and processes have come of age, with sourcing strategies, e-procurement and spend data analysis tools generating significant returns on investments.

While senior financial executives are charged with squeezing even the smallest inefficiencies out of routine business processes, few have explored perhaps the final frontier in supply chain management -- the payment.

There is no single answer to the question, "How should I pay?" An important place to start is learning about the fundamental economics and benefits of each type of payment. Your mission is to achieve an optimum mix of electronic and paper payments.

The first rule of your payment strategy should be, "Think cards first."

The hard cost facts

Each payment option -- paper checks, ACH, credit card or wire -- has benefits as well as restrictions. Paper checks remain the reigning champion of payments when it comes to business-to-business transactions.

Annual business-to-business spending totals more than $7.8 trillion, as reported by Tower Group Commercial Payment Cards in the U.S. Product Overview December 2001, with 86 percent of those transactions paid by check, according to a survey by the Electronic Payments Network.

Yet, the days of paper checks as the dominant payment type may be numbered. Check 21, a law that became effective late in 2004, promotes the future electronic exchange of check images as part of the check-clearing process in order to reduce the distance that paper checks must be physically transported.

Many businesses previously benefited from the float, or lapse in time, between issuing the check and having the funds debited from their accounts. The reduction in this float benefit is expected to reduce the reliance of businesses on checks.

Those still clinging to this payment type may find increasing costs charged by their financial institutions to process the paper.

When Automated Clearing House (ACH) payments are combined with information or data within an electronic data interchange, there is significant value, especially when used to process invoice and payment information with your strategic trade partners. Of course, ACH is relatively inexpensive when used on its own, but you diminish your float benefit as ACH transactions typically settle within two days.

Wire is more costly but is the best payment tool to guarantee and expedite payments.

Purchasing cards are the fastest-growing payment tool in the marketplace. Card acceptance has become more widespread, and cards are used to purchase almost everything a business needs -- from office supplies and hardware to customer entertainment.

Cards allow you to make just one payment to the bank each month to cover all of your card transactions made with individual vendors. Cards can reduce soft costs of about $5 to $15 per invoice in accounts payable personnel and monthly check writing activity.

Most important, purchasing cards are one of the few cash management tools that can generate income for you through a revenue share program. Your revenue potential is based on the total volume spent on your purchasing cards.

Other factors that might impact your payment choice should be discussed with your financial adviser. Based on the costs and benefits of each payment type, a complete overhaul of your payables may be in order.

Remember to think card first, ACH second. Many businesses that are finally on board with purchasing cards are wondering why they hadn't done it sooner.

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 him at (513) 651-7558.

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.

Friday, 22 April 2005 10:52

Go global

Increased pressure on the dollar can bring with it substantial advantages to businesses. Many business leaders see opportunity in a weaker dollar value through the international marketplace. Of course, looking to a foreign market is nothing new; successful business leaders have always thought beyond our borders to open a world of new market opportunities.

Are you ready? To be successful, you need to make informed decisions and a commitment in terms of time, staff and funds. But it's within your reach.

The numbers add up

First, ask yourself, is your product something that foreign consumers or manufacturers might need or desire? If your answer is yes, you should consider the value of exporting.

Are you worried that your company isn't big enough to export? Think again. Size isn't an issue.

Companies looking to increase profits through exporting have at least two options - hold the price of your goods constant in foreign dollars and get more back in U.S. dollars than you would have previously, or keep your price consistent in U.S. dollars and make more in volume. That means that if your product costs $1 in euros, it now takes more dollars to equal a euro. If you hold your price the same in dollars, the lower cost in euros might convince foreign customers to buy more.

Are you ready?

When evaluating the export potential of your business, start with these basic questions.

* Has your product been successfully marketed in the United States? If so, there's a good chance that it will be successful in similar markets abroad.

* Have sales declined locally due to increased competition or the introduction of a more technologically advanced model? Other countries may not need state-of-the-art technology and may welcome another supplier.

* Is your product unique? Does it have important features that are difficult to duplicate abroad?

If your product successfully measures up to these general standards, the next step is to assess your company's commitment to developing a proactive, long-term export business. According to the Pennsylvania Economic Planning and Development Council, additional self-assessment questions include:

* Does exporting fit into your overall marketing and sales objectives?

* Can you give foreign customers the same attention and service you give to U.S. customers?

* Are you willing to modify product packaging and ingredients to meet foreign regulations and cultural preferences?

* Are you aware of the constant change in foreign exchange rates that can impact sales and profits?

Formulating an export strategy based on solid information and proper assessment will help bring success.

Local resources and expert advice

Perceived barriers to exporting, such as foreign languages, foreign currencies and other issues, can be better navigated with input from resources in your own business community, including small business development centers and regional planning and development commissions.

Select financial organizations also can help. From setting up letters of credit and hedging foreign exchange risk to securing financing for your buyer and establishing local banking services, banks work with companies and sponsor trade workshops to spur growth beyond the U.S. borders.

Don't let the "E" word dissuade you. Exporting can be quite profitable, especially in this time of a weaker dollar. With improvements in communications and technology, exporting is a real option for many companies. How about yours?

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. PNC Bank is a 2004 Presidential "E" Award winner honored by the U.S. Department of Commerce for export services. Reach Willingham at (513) 651-7558.

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.

Tuesday, 01 November 2005 06:44

Protecting your business against fraud

Warnings about identity theft and tips to protect your personal bank accounts are touted everywhere, but little fuss is made about business owners protecting their accounts against fraudulent activity. Thanks to a variety of bank services and technology, you have some options today to protect your business.

Paper checks
Despite the increasing popularity of electronic payments, nearly 60 percent of all business-to-business payments today are made via a paper check. Here are some ways to ensure your checks are secure.

  • Use checks that are imbedded with watermarks and microprinting. These features deter fraud by making reproductions more difficult.

  • Use checks made of heat-sensitive ink and paper, which are more difficult to reproduce using basic photocopying equipment.

  • Use electronic bank account statements if available. Paper bank account statements put you at greater risk by making sensitive information accessible through the mail.

  • Keep track of your checks. It may seem obvious, but one of the best ways to protect your business from fraud is to keep track of where your physical checks are at all times. Don’t leave checks sitting out for others to steal.

  • Add a positive pay or payee positive pay service to your business accounts — two add-on services available through most banks. For a nominal charge, any checks processed through your corporate checking accounts will be carefully scrutinized.

A positive pay service starts with you sending a list to your bank of all checks issued. The bank matches the check number, dollar amount and account numbers of all inbound checks against your list.

Any checks that do not match your list are flagged for review. With most positive pay services, you can go online to review images of your checks that are flagged as exception items. You reduce disbursement risk by easily reviewing suspect items and alerting the bank whether to pay or to return.

With payee positive pay, when providing your bank the check number and dollar amount of checks issued, you also include the payee. Again, you may review exception items online and alert the bank to pay or to return the check.

Electronic payments
Technology is helping businesses secure their payables and receivables when electronic payment formats are being used.

  • Automated clearinghouse payments (ACH). It is cost effective for suppliers and customers to pay via ACH. However, you must provide your bank account information before an electronic payment can be initiated.

While necessary, it puts your accounts at risk. With a Universal Payment Identification Code (UPIC), you can receive electronic payments without disclosing confidential bank information.

Your UPIC number serves as a universal remittance number and masks your real account numbers. UPIC technology also limits account activity to credit payments and blocks all debits. If you should move your accounts, the UPIC number remains the same.

  • Credit card payments. To protect credit card payments, both Visa and MasterCard have implemented universal precautions for businesses that accept credit card payments.

The standards require companies to follow certain procedures when handling cardholder data and include a number of criteria, such as quarterly network scans and audits by qualified independent security assessors to ensure merchants and service providers protect cardholder data.

  • Purchasing cards. New technology is now available to enhance controls on purchases made by employees with purchasing cards. This technology enables your organization to instantly manage the available credit on individual purchasing cards.

Technology advances also let you to limit purchasing activity through an array of card-spending controls, including monthly and per-transaction limits, as well as merchant spend categories that only permit use of the card with certain merchants. Some card programs provide online access to manage these parameters directly from your desktop computer.

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.

Benjamin Willingham is sales manager for corporate banking in Ohio at PNC Bank, National Association, member of The PNC Financial Services Group Inc. Reach him at (512) 651-7558.

Tuesday, 30 August 2005 07:41

Sweep accounts

The market is flush with cash and interest rates are rising — signs that this is an ideal time to explore options to manage your business’s short-term liquidity. The key to success in liquidity management is to strike a balance that offers you easy access to your ready cash, while taking advantage of the rising interest rates. Where do you start?

Sweep accounts are the easiest and most efficient way to manage the investment of your operating cash. A sweep account is a bank account from which, at the close of each business day, the bank automatically transfers amounts that exceed a certain level into an income-earning account or investment. Your working-capital needs are taken care of; excess funds earn income overnight; and, best of all, you don’t lift a finger. However, you may not be aware of the many ways to make a sweep account work for you.

Money market investments
Until recently, funds transferred to sweep accounts were usually invested in traditional money market investments, such as repurchase agreements or commercial paper. These short-term investments feature flexible maturities that react daily to changes in interest rates. Other investment options may not react to interest rate increases for up to 30 days, making money market investments an ideal place to park funds on a temporary basis. The funds are swept from your account after the close of business and returned the next day, along with any accrued interest.

Money market mutual funds
While repurchase agreements and commercial paper remain a viable option, money market mutual funds have become attractive to businesses due to strong ratings and diversification. These accounts allow you to determine how much operating cash you need on a daily basis, and keep the rest in a flexible money market mutual fund account to continue growing. Unlike traditional sweep accounts, the money remains in the investment account until needed in your checking account. Any cash above the account’s target balance is invested in the sweep account at the end of the day. The sweep investment balance is still available to the business, if needed.

If your business requires as little as $100,000 in daily operating cash, a sweep account may be quite useful. A low monthly fee is usually associated with sweep accounts — generally less than $200. You may choose to stay with the more traditional sweep accounts involving repurchase agreements or commercial paper, based on your investment policies and guidelines. Money market mutual fund accounts, however, allow for greater flexibility in investment type (including tax-exempt options and diversification).

Direct investment
If you’re looking for a short-term, but not day-to-day, way to manage excess operating cash, a direct investment may be a good option. Direct investments enable you to invest some operating cash in an interest-bearing bank deposit, a U.S. Treasury bill, commercial paper or short-term, tax-exempt municipal bonds. These are generally 30-day to 90-day investments, with higher yields than traditional sweep accounts.

Keep in mind that direct investments are also more complicated and require more monitoring. Direct investments are appealing for those businesses that are willing to take on a little more risk and have at least $5 million to $10 million in assets to invest. They are a good fit if you can identify this amount of expendable operating cash each month. However, if you redeem a direct investment early, there may be a risk that the investor could lose money.

While it may take some time to learn the complexities of each sweep option, it may be well worth it — especially in an environment of rising interest rates. Call on your trusted financial advisor —often, if necessary — for more information about all of your options.

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 him at (513) 651-7558.