For treasurers planning on financing for strategic transactions one of the first orders of business is to cast a wide net. That’s because building in contingencies for the use of financing proceeds can help avoid having to turn to capital markets both to take out a bridge and raise subsequent capital for a recap.
At a first-half meeting of The NeuGroup’s Treasurers’ Group of Thirty Large-Cap Edition (T30 LC) two member presentations underscored the need for contingencies in financing. This plays into the broader trend of corporates seeking to diversify their sources of funding and ticking all the boxes on accessing capital markets and bank and non-bank credit markets to ensure access to financing when they don’t really know what is going to happen next in financial markets.
One treasurer recommended actually tapping alternative funding options, including Tier 2 commercial paper to ensure that they will be there when needed. Also, if a merger involves a spin-off post-acquisition, treasury needs to have a contingency plan to go to market on an accelerated timetable when required, such as to fund a spinout when the pro forma financials are still valid and the parent is not in blackout.
When one of the members’ organization went to redeem bonds after a failed bid, it found some bondholders were willing to keep them since they were trading at a premium to the call. One could also negotiate a draw provision in a bridge loan, so that it can be drawn on (say, for a period of 20 days) without triggering the takeout. Bottom line: think twice about mandatory redemption features.
Also, when needing to move quickly in response to opportunities or avoid negative contingencies, it can be helpful to have more than one lead bank. One of the presenting members noted having two lead banks and bringing in two additional leads, which resulted in the best of all possible worlds of having two leads on the transaction and two on the financing. So a couple more banks in the mix is okay; however, no too many more.
Related to that banking suggestion was to use delayed draw triggers and other features can help mitigate the cost and add flexibility. Both presenters urged members to shop banks from different jurisdictions, since term loans tend to be more capital unfriendly to European banks than US banks, for instance.
Treasurers also shouldn’t fear term loans. In a merger-spin type of transaction, it can be more difficult to sell bonds because you are, in effect, selling bonds in a company that won’t exist later or that does not have any financials because it does not exist yet.
Finally, the big and broadly applicable takeaway from the discussion on interim financing for strategic transactions was how treasurers need to ensure that their contingency plans are both well understood and operational (i.e., by making use of them before needed) in order to expect them to succeed.