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 to advance only about $200,000 and would earn only a few hundred dollars of interest, barely enough to cover the administrative cost of making the loan.
The solution to this problem is a swing line. Instead of asking all 16 banks in the syndicate to advance money, the company can go to one bank, designated as the swing line lender (typically the administrative agent). The swing line lender can do the full advance up to a pre-agreed limit, typically 10-20% of the total facility (for ACCO, the swing line limit is $30 million). While the swing line lender makes the loan, the risk is really borne by the entire lending group. The credit agreement allows the swing line lender, at any time, to force the entire bank group to refinance the swing line loan (i.e. to force each bank to advance their proportionate share).
Thus, the swing line provision makes the administration of the revolver easier for the borrower, the administrative agent, and the entire lending group, without changing the amount of credit risk each bank has agreed to take. For this reason, most large syndicated revolvers allow for a swing line.