| US private placement market allows corporate borrowers to optimise their financial flexibility |
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| Over the past 24 months, seven Irish corporates have completed US private placements with a total value of $2.9 billion. James Lidierth and Andrew Fitzpatrick examine how the US private placement market has enabled Irish corporates to raise finance from US institutional investors on highly competitive terms. |
Since the early 1990s, the manner in which large companies arrange their core funding requirements has been heavily influenced by the syndicated loan structure. This reflects the fact that for borrowers, syndicated loans are an effective way to raise borrowings and to manage ongoing banking relationships. For lenders, syndicated loans provide an effective means by which to provide large scale lending facilities and to manage the risk profile of their overall loan portfolio.
The efficiency of syndicated lending stems primarily from the benefit of standardising borrowing terms and conditions across different lenders. For example, in a situation where a borrower has several bilateral facilities from a number of lenders, each with different terms (repayment profile, conditions, covenants etc.), there is inevitable additional complexity and inefficiency. From the lender’s perspective, the position is not ideal either, as lenders will be concerned that they may be disadvantaged, either commercially (different pricing) or structurally (security, covenants) relative to other lenders to the same company.
Through arranging a syndicated loan facility, the problems identified above can be neatly resolved. Under a syndicated loan facility, two or more lenders will make a loan on identical terms and conditions (save possibly for the amount that each bank provides) using a single loan agreement, with documentation and administrative arrangements typically co-ordinated for the banking group by one bank, the agent bank. Specifically, the repayment terms, pricing, covenants and other loan terms, which under bilateral facilities could vary from bank to bank, will be identical.
A key benefit for the borrower is that, although formal bank syndicate meetings will be held on a regular basis, it will remain free to have direct dialogue with individual banks and therefore to maintain relationships with its key relationship managers.
While predominantly involving standard term loan facilities, all types of facilities can be provided on a syndicated basis, including revolving short-term working capital facilities, letter of credit facilities and guarantee facilities. It is also usual for complex project finance or major construction facilities to be provided on a syndicated basis.
In many cases, smaller overdraft or working capital facilities (which may not be large enough to involve more than one provider) will continue to be provided on a bilateral basis, with these facilities sitting alongside a larger core syndicated debt package.
In this scenario, all facilities will share common security and terms and, where appropriate, cross default provisions will also apply to ensure equality of treatment among all debt providers.
Under a syndicate structure, a borrower will typically mandate one (or a small number of banks) as a lead bank to arrange and, where necessary, to underwrite the borrowings required. This bank will be designated as the Mandated Lead Arranger (MLA). The MLA will agree the basic terms and conditions of the facility with the borrower. In most cases, the MLA will also be responsible for syndicating the loan to the wider group of banks.
The syndication process typically commences with the MLA and borrower agreeing on an optimal structure for the facility package. This involves agreement on the total amount to be raised, and the optimal number of banks in the syndicate. The MLA and the borrower will then compile a list of suitable banks to invite to participate in the facility based on the desired end result. Potential participants will normally include existing bilateral lenders and clearing banks and the panel of banks invited into each transaction will be based on a set of criteria which will include existing relationships, sectoral expertise and appetite, current credit capacity and the size and structure of the facility in question.
This is a key stage of the process as a strong and well structured bank group can play a major role in the ongoing development of a borrower’s capital structure. It is important that all participants have a good understanding of a borrower's business, strategy and development plans and, also, that all banks have sufficient credit appetite to ensure that they (and the syndicate) will have the ability to increase their exposure to the borrower through the syndicate over time as the borrower’s business expands.
Under a syndicated facility, the borrower can achieve market based pricing and structuring which can provide a useful benchmark for any remaining or future bilateral loan facilities. Banks that accept an invitation to participate in the facility will be provided with a suite of information on the facility to enable them complete due diligence and obtain credit approval. The MLA will normally be responsible for negotiating loan documentation with the borrower which, when agreed, will be issued to participant banks for their comments and subsequent execution. The above process by which negotiations, structuring and documentation are co-ordinated by the MLA save management time and outlay and ensure a fast completion. It is important to note that, from the borrower’s perspective, the company involved remains in full control of decisions made but can manage the facility arrangement process in a very efficient manner.
On an ongoing basis, all procedural matters in terms of requests, provision of financial information, funds transfers etc. are co-ordinated through the agent bank. It is noteworthy that a syndicate facility has the capacity to be an evolving structure which, with the consent of the banks, is capable of amendment as the borrower’s business develops and grows and banking needs change over time.
Choosing the partner bank which will act as MLA on a transaction is a key business decision for a borrower as the chosen bank will have a critical role in the funding process.
In recent years, the syndicated loan market has been complemented by the emergence of a strong US private placement market. This market now enables Irish corporates to raise long-term finance (normally for terms of seven to 15 years, although tenors of 30 years are also possible in this market) from US institutional investors on highly competitive terms. Terms and conditions are generally no less favourable than those that apply to bank facilities and often will permit more flexibility in terms of covenant levels. For maximum efficiency, the recommended minimum issue size for the US private placement market is in the region of US$50-75 million.
In relationship management terms, the interaction with the underlying private placement investors is akin to a banking relationship albeit that it is co-ordinated by an arranger bank. In the Irish market, the trend has been for corporates to maintain a core bank facility (syndicate or bilateral) in addition to private placement borrowings thus maintaining key banking relationships.
Ulster Bank plays an important role in assisting leading Irish public and private companies, across a wide variety of sectors and industries, to meet their funding needs. In recent years, we have acted as MLA in syndicate loan transactions for a variety of major Irish borrowers.
Over the past 24 months, seven Irish corporates have completed US private placements with a total value of $2.9 billion. Ulster Bank and RBS acted as sole arranger for six of these seven transactions. In addition to arranging the private placement issue, we have also provided a comprehensive financing package, including innovative interest and currency hedging facilities. |
James Lidierth and Andrew Fitzpatrick are directors in Ulster Bank Business & Corporate Banking.
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| Article appeared in the February 2005 issue.
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