Financing and Capital Markets

Exploring Syndicated Loans

A Healthy Market Environment for Mid-Sized Borrowers

The environment for mid-sized borrowers appears bright. More lenders, new products and competitive terms are offering borrowers access to much-needed capital that will help fuel continued growth, expansion and acquisition. Perhaps due to misperceptions that size is a limiting factor, many mid-sized companies often overlook the inherent benefits of syndicated loans, choosing to rely instead on traditional single-provider loans or bi-lateral credit facilities with multiple lenders. While this is understandable from a familiarity and comfort perspective, a syndicated loan ultimately may be more advantageous to a business’ long-term best interest.

While syndicated loans are most commonly utilized to address the needs of large, acquisition-focused firms, syndicated lending can also be a flexible funding source for a growing number of mid-sized companies. Not only can syndicated loans provide a business with one-stop access to a larger amount of capital than might otherwise be available from a single provider, they also offer simpler documentation than multiple loans, and access to a broader network of financial relationships.  As a result of this heightened access, a syndicated credit facility offers a sound platform for growth that often proves to be beneficial as a firm expands and matures.

A primer on syndicated loans

In contrast to traditional single-lender loans, syndicated loans are provided by a group of lenders and are structured, arranged, and administered by one or several commercial or investment banks known as arrangers or agents. In all types of syndications, the arranger’s relationships with other lenders and its ability and willingness to hold part of the loan on its own books are critical to the smooth execution of the deal. These loans are commonly used for working capital needs, refinancing, funding acquisitions, leveraged buyouts and return of capital to shareholders.

There are four main types of syndicated loan facilities: revolving credit lines that allow borrowers to draw down, repay, and re-borrow; traditional term loans; letters of credit (LOCs) which are guarantees provided by the bank group to pay off debt or obligations if the borrower cannot; and equipment/acquisition lines that can be used for a given period to purchase specified assets or equipment or to make acquisitions.

For companies considering an initial syndicated facility, the decision to move beyond a single lender may be advisable even before reaching the maximum lending limit of that company’s current lender, especially if the business anticipates further growth down the road. As a company's financial partner, SunTrust can leverage its expertise as a lead arranger to spend extensive up-front time in developing a deep understanding of a client's growth strategy, liquidity profile and cash flow needs to provide appropriate guidance on establishing a syndicated credit facility. Even in instances where a single-lender solution is feasible, a syndicated loan may be advisable to help ensure that a client's business has future access to capital.

Suppose that a company's immediate needs only necessitate a $10MM credit facility for working capital, but there’s also a $40MM potential acquisition on the horizon. This is where a savvy lender like SunTrust will look beyond short-term capital requirements to also factor in long-term growth goals. By syndicating a $50MM credit facility now, when and if the acquisition opportunity presents itself, the company in this example would be fully prepared to act.

Access to growth capital

As both banks and institutional investors look for ways to expand and diversify their own portfolios, syndicated loans serve as an important vehicle to quickly establish relationships and deploy capital in a floating-rate debt instrument that provides lenders with a healthy measure of protection against rising interest rates.  For non-bank lenders such as pension funds, hedge funds and commercial finance companies, syndication is often their sole source of booking new loans, as they don’t typically maintain direct relationships with mid-sized companies.

For example, a privately-owned, diversified aviation property development, leasing and construction company recently came to us seeking a credit solution that would competitively position the business to capitalize on future growth opportunities. Specifically, they needed capital to refinance existing indebtedness, finance acquisitions and provide a line of credit for aviation real estate development and working capital.

In order to provide maximum flexibility and expose the company to a more diversified investor base, SunTrust targeted a broad syndication and successfully raised $200MM of senior secured credit facilities among 12 total lenders, including three agent-tier commitments.

Mitigated risk for both borrowers and lenders

By joining forces, lenders in a syndicated facility are able to spread out loan risk which allows them to provide greater access to capital than a single lender could provide. Often overlooked, however, is the fact that a syndicated loan also affords significant risk mitigation for a borrower. It’s generally a sound financial practice to not have all of one's “credit eggs” in one basket. Through syndication, a borrower is able to establish a broader financial relationship with multiple lenders who, over time, gain greater familiarity with the particulars of its business.

Whether a company is new to the syndications market or an experienced issuer, now is a great time to sit down and have a conversation with a SunTrust relationship manager to explore whether a syndicated loan may be advantageous for present and/or future credit needs.

At SunTrust, we are committed to helping our clients meet their growth and financing goals. The more our bankers know our clients, their businesses and their financing needs, the greater our comfort level in lending to clients, and the more creative and innovative they can be in financing growth. As a leading universal bank, SunTrust can offer our clients extensive debt and equity expertise, in-depth industry insights, and a commitment to work with them to help achieve their financing objectives.  For further insights or to discuss your growth and financing needs, talk to your SunTrust Relationship Manager.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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