Companies with large capital needs often employ a commercial banking relationship that includes a syndicated bank loan — a commercial loan that is provided by multiple banks (a bank group), where one bank acts as the lead arranger and administrative agent for the bank group. A company’s bank group can be as small as two or three banks, or, depending on the size of its credit facilities, can be much larger to include dozens of banks. Over the last 15 years, syndicated bank loans have become the dominant way for companies to finance their capital needs.
“Despite what you hear about banks not lending, 2011 was a record year for syndicated multi-bank loan financing, topping $1.8 trillion,” says Ron Majka, senior vice president and manager of loan syndications for FirstMerit Bank. “The syndicated loan market is very healthy and active, and local banks in Northeast Ohio are hungry to support healthy growing companies.”
Smart Business learned more from Majka about multi-bank loan syndications and how to tell if it could benefit your company.
What types of companies could benefit from considering a multi-bank loan syndication?
The need for a syndicated bank loan is often event-driven. Frequent triggering events include the financing of mergers and acquisitions (M&A), new construction associated with corporate expansions, large equipment purchases, or dividends to owners (referred to as leveraged recapitalizations). In addition to event-driven situations, the need for a syndicated bank loan sometimes can be more evolutionary. As companies reach a certain size, they may outgrow a singular relationship with one bank. Moving to a larger, syndicated multi-bank credit facility is a natural next step for these companies.
Why are loan syndications becoming so popular?
Multi-bank syndicated loans are popular because they are the most flexible and economic financing alternative available to companies. Other methods of raising large amounts of capital include going public through the sale of stock, issuing bonds, or attracting investors through a private placement. Each of these options is much more expensive, and not nearly as standardized and flexible as bank loans. From a banking perspective, nearly every bank that is active in commercial lending is involved in some level of providing syndicated loans. Together, these factors contribute to the amount of multi-bank syndicated loans issued -— now exceeding $1 trillion per year.
How can loan syndication benefit a company?
Having an optimal credit facility is a crucial component to the long-term success of a company. A syndicated loan sets the platform for a company’s growth. A simple two-bank syndicated loan facility can be very easily expanded to accommodate increased loan amounts and additional banks, to complement a company’s growth needs. Another benefit of loan syndication is that a company can tailor a bank group that fits its specific corporate strategy and needs. For example, a Northeast Ohio company that is engaged in international business may choose a strong local agent bank that provides stable, trusted leadership. That agent bank might then add an international bank to the bank group to help provide overseas trade and banking needs for that company. Also, competition is always a good thing. Having multiple banks involved in competition is a way to make sure the client is always getting the best execution, and that its banking terms and structure are most favorable.
How can a company choose the right agent bank to lead the loan syndication?
It’s important to put a lot of thought into whom you are entrusting as your agent bank. Bigger isn’t always better, nor is it wise to adopt a cookie-cutter approach. You want an agent who understands your business, takes the time to fully comprehend your company’s strategy and growth plans, and then crafts a financing arrangement that helps you achieve those goals. Choose a bank where you will have an experienced group that is solely dedicated to structuring, leading, and administering multi-bank syndicated loans. Lastly, any successful relationship is a two-way street. Make sure you are comfortable with your agent bank’s culture, strategy, leadership, health and stability. This relationship is very important.
How does the process of issuing a syndicated loan work?
It is typically a five- to eight-week process from start to finish. First, it involves choosing the right agent bank. Next, the company works with the agent bank to craft the right strategy to produce the kind of bank group it wants to achieve. For instance, you may have a number of questions to consider. Do you want international or local banks as part of your bank group? Are you interested in banks that are active in or have expertise in your industry? Should you just include those banks you are familiar with? Or, are there banks that you do not know that can add value to your bank group? Once you determine your optimal bank group, the agent bank will use its knowledge of the marketplace to approach and attract the right partners.
The process also includes the agent bank and the company working together to create materials that fully describe the company’s business, philosophy, industry and corporate plans. That package of material, called a confidential information memorandum, is a 25- to 100-page document that includes a complete assessment of the company and its operations. Once everything is set, the opportunity is launched to the bank market and the agent bank works with the targeted banks and the company to answer questions and move those banks through their credit approvals. This process ultimately culminates in a successful closing and funding of the company’s multi-bank syndicated credit facility.
Ron Majka is a senior vice president and manager, loan syndications for FirstMerit Bank. Reach him at (330) 996-6446 or email@example.com.
It has been touted as the most significant financial reform since Franklin D. Roosevelt’s New Deal.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, created in response to the financial crisis of the last few years, was signed into law almost one year ago. While not all of its 387 rules have been adopted, the scope of reform will affect investment advisers, investors, business owners, management and the public for years to come.
According to Todd Crouthamel, a director, Audit & Accounting, and a member of the Investment Industry group at Kreischer Miller, Securities and Exchange Commission chairman Mary Schapiro said, “The purpose of the legislation is to create a more effective regulatory structure, fill regulatory gaps, bring greater public transparency and market accountability to the financial system, and give investors protections and input into corporate governance.”
“By the time it is fully adopted, the Dodd-Frank Act will impact virtually every aspect of our financial lives,” says Crouthamel. “The task is enormous, with 145 rules scheduled for adoption in the third and fourth quarters of 2011, plus 30 that are behind schedule.”
Smart Business spoke with Crouthamel about the impact of this legislation on private fund investors and investment advisers.
How will this legislation impact private fund investors?
The Dodd-Frank Act increases the net worth and investments under management requirements for an individual to qualify to invest in private funds. The rules exclude the value of an investor’s primary residence in determining net worth, and this will likely prohibit more investors from investing in private funds. SEC registration is also a significant issue. Many private fund advisers, who were previously not required to register with the SEC, will likely be required to register. This increased oversight may result in additional protections for the private fund investors; however, these protections will not be free. Private fund advisers are going to incur significantly more administrative costs in complying with the SEC requirements, and some of those costs may be passed along to investors.
What effect does the legislation have on SEC oversight of investment advisers?
The debate continues as to who should have regulatory oversight over registered investment advisers. The SEC is overburdened and the number of exams that it can complete is relatively small in relation to the number of advisers. As such, advisers with assets under management of $100 million or less are required to deregister with the SEC and to register with their state agencies.
The Dodd-Frank Act called for a study on enhancing adviser examinations. In January 2011, the SEC’s Division of Investment Management reported the results of its analysis and recommended that Congress consider one, or a combination of, three approaches to strengthen the SEC investment advisers’ examination program. First, it suggests authorizing the SEC to impose user fees on SEC-registered advisers to fund examinations. Second, it proposes authorizing one or more Self-Regulating Organizations to examine SEC-registered advisers. Finally, it recommends authorizing the Financial Industry Regulatory Authority to examine dual registrants for compliance under the Advisers Act. This could result in a political battle between the rules-based system by which broker/dealers are governed and the principles-based system governing registered advisers.
How does the Dodd-Frank legislation impact public company compensation disclosures?
In January 2011, the SEC adopted rules regarding shareholder approval of executive compensation and golden parachute compensation agreements. New rules also require additional disclosure and voting regarding golden parachute compensation agreements with certain executive officers in connection with merger transactions. All of these required votes under the new rules are nonbinding; differences between investors’ recommendations and actions taken by boards of directors could embarrass a company and lead to directors not being re-elected.
Finally, the proposed rules include provisions that require institutional advisers to report their say on pay votes. This provision has not yet been adopted, but it will certainly increase advisers’ administrative costs.
What widespread financial reform is also included in this legislation?
The Dodd-Frank Act extends to credit rating agencies, which were at the center of the recent financial crisis. As a result, Dodd-Frank includes provisions designed to improve the integrity of these credit ratings, including requiring many of the agencies to submit an annual report regarding their internal controls governing the implementation and adherence to procedures and methodologies for determining credit ratings.
There are also new whistleblower rules that provide increased incentives to individuals who voluntarily provide the SEC with original information about a securities law violation, which leads to successful enforcement by the SEC, with sanctions of greater than $1 million.
What can be expected going forward?
Because so much of the Dodd-Frank Act has not been finalized, it is difficult to determine what all of the final regulations will look like. For investment advisers, the challenge will be to stay current with new regulations and to ensure the firm’s policies and procedures reflect the new regulations. For investors, the challenge will be to decipher additional reporting requirements and follow who will ultimately be responsible for oversight of the investors’ advisers. Keeping a watchful eye over the coming months will be critical for advisers and investors alike to ensure they understand the latest developments and how they will be affected.
Todd Crouthamel is a director, Audit & Accounting, and a member of the Investment Industry group at Kreischer Miller. Reach him at firstname.lastname@example.org or (215) 441-4600.