A Swing Line for Swingline

In November 2011, ACCO Brands, a leading manufacturer of office products, and MeadWestvaco Corporation, a leader in packaging, agreed to merge MeadWestvaco’s Consumer & Office Products business into ACCO Brands in a transaction valued at approximately $860 million. The deal, which closed in May 2012, gave MeadWestvaco shareholders 50.5% of the combined company.  Among the company’s many products are Kensington computer accessories, Mead school supplies, and Swingline Staplers. As part of the transaction, ACCO refinanced virtually all of its existing debt.  The new capital structure included $500 million of high yield bonds and over $750 million of term loans.  In addition, the company obtained two revolving credit facilities: $200 million U.S. dollar, and $50 million multi-currency. Let’s take a look at the $200 million U.S. dollar revolver.  It has commitments from 16 banks, ranging from about $4 million to about $20 million (i.e. 2% to 10% of the total facility) and was expected to be used for general liquidity needs and letters of credit.  If the company has a financing need, say $100 million for 6 months, it sends a borrowing notice to the administrative agent, in this case Barclays, who sends a notice to the other 15 banks, who all advance their proportionate share of the total borrowing.  This process happens for hundreds of syndicated revolvers every day. But what if the borrowing need isn’t $100 million for 6 months, and is, instead, $10 million for 6 days?  The process could work the same as for the larger, longer need, but that would mean that the bank with the smallest commitment, in this case Deutsche Bank, would have...

Top 10 Credit Topics of 2010

Here’s our list of the top 10 topics on the minds of credit professionals in 2010: 10) Risk Management – We’ve written many times this year about risk management, both good and bad.  Whether it was BP and operational risk, suppliers dealing with customer concentration risk (or “Wal-Mart Risk”), or Lehman just not managing risk.  This topic was on our radar in 2010 (and needs to stay there into 2011 and beyond). 9) Games CFOs Play – Aggressive financial reporting (and outright fraud) can happen at any time, but management’s motivation to do it is heightened during an economic downturn when there is pressure to “hit the numbers” (and not breach covenants, etc.). 8 ) Managing High Risk Clients – Sure the recession is over, but many companies are still struggling with high leverage, high competition, low sales growth, and high costs.  Lenders and bondholders will be working with many “high risk” clients well into 2011. 7) Intercreditor Priority – When times are good (think the 2003-07 credit bubble), no one pays much attention to collateral and subordination (or covenants, or any other part of credit documentation for that matter).  The restructurings and bankruptcies of the great recession reminded us how important these issues are.  We fear that the market is already starting to forget these lessons (think covenant lite and second lien!). 6) Cash Flow Analysis – Cash is king.  Real cash, not EBITDA.  Enough said. 5) Liquidity – Many CFOs (and lenders) have learned the hard way that liquidity can be the most important element of financial strategy.  Our favorite analytical tool for looking at liquidity is...

Why Isn’t Ford Bankrupt?

The Terrible Auto Market With the success of the GM IPO, we may be tempted to forget the terrible decade the U.S. auto industry has just completed.  Car sales steadily declined from 2000 through 2007, then collapsed in 2008 and 2009 to a level not seen since 1951.  Truck sales, which saw dramatic growth in the 1990s and finally eclipsed car sales in 1999, saw some growth in the early 2000s, but also dramatically retreated in the 2007-09 recession. The “big 3” U.S. auto makers also suffered market share declines in this period, from a combined 65% of the U.S. market in 2000, to 53% in 2006, to 44% in 2009.  It should be no surprise that GM and Chrysler filed for bankruptcy in 2009.  The real question is: Why didn’t Ford go bankrupt? Why Didn’t Ford Go Bankrupt? By 2006, it was clear to the big 3 auto makers that there was a problem.  Ford’s sales and net income had been flat for many years.  Ford, like the other auto makers, began a major restructuring to reduce capacity, cut costs, and accelerate product development.  The key to Ford’s success, however, was in aligning its business and financial strategies. How did the Ford finance team respond to declining sales and the company’s new operational restructuring?  By borrowing over $12 billion, increasing the company’s auto sector debt (excluding the financial services business) by 66% from $17.9 billion to $30.0 billion.  Ford borrowed this money at the peak of the credit bubble, right before the recession hit and vehicle sales dropped by over 1/3.  Why isn’t Ford bankrupt? Why the New...

More Companies Have “Wal-Mart Risk”

For the 7th time in 10 years, Wal-Mart is #1 on the Fortune 500 list (in the other 3 years, it was #2).  The company is the largest private employer in the U.S. and accounts for 8% of total retail sales in the US. As big box retailers (including Wal-Mart, Target, The Home Depot and others) have gained market share over their smaller competitors, consumer products companies feel the need to sell to these large retailers in order to grow sales.  For some companies, however, selling to the big box retailers has a darker side – what we call “Wal-Mart Risk.” Customer Concentration Risk The risk is customer concentration – that a significant portion of a company’s sales are to one company.  The dangers of customer concentration include: 1)    Credit risk – the risk that the customer will go bankrupt and the company will be unable to collect its receivable. 2)    Switching risk – the risk that the company will build capacity to satisfy a large customer, and then the customer switches to another supplier, leaving the company with significant excess capacity (and perhaps unsold inventory). 3)    Buyer power – the risk that the customer uses its position as a large buyer to drive down the price it pays the company for goods. In order to address customer concentration risk, revolving credit agreements that include a borrowing base often exclude accounts receivable from customers above certain concentration limits (say 10% of total receivables).  This provision significantly limits revolver availability for some borrowers and does not protect lenders from the main risks of customer concentration – switching risk and buyer...

The Refinancing Cliff Is Coming

The problems of the last leveraged buyout  bubble are still with us.  From 2004 through 2007, the U.S. experienced an unprecedented level of LBO activity.  That all ended with the collapse of the debt markets in the summer of 2007 (and the disappearance of the debt markets after the Lehman bankruptcy). LBOs are funded primarily with debt – somewhere between 60% and 80% of the capital structure.  These are the debt products used: Institutional Term Loans (also know as “Term Loan B” or “TLB”) – often the single biggest tranche of debt, these loans are sold to institutional investors, such as collateralized debt obligations (CDOs) and prime rate funds.  They have very little principal amortization and a final maturity of 6-7 years. Pro-rata Loans (comprised of a revolving credit facility and a Term Loan A) – these loans are sold to banks and typically make up a smaller part of the capital structure than the TLB.  Standard terms for a Term Loan A include significant principal amortization and a final maturity of 5 years. High Yield Bonds – are sold to institutional investors.  They have a bullet maturity (i.e. no principal amortization) and a final maturity longer than the Institutional Term Loans, typically 7-10 years. The Debt is Coming Due! Starting in 2012, we will see significant amounts of LBO debt coming due.  Knowing the typical maturities of the debt products and counting forward from the boom years of 2006 and 2007, first we’ll see large amounts of pro-rata loans come due, then institutional term loans, then high yield bonds, as this chart shows: What is the solution? Highly...