By Dennis McCarthy – (213) 222-8260 – firstname.lastname@example.org -
The law firm, Latham & Watkins, has been a great source for valuable webinars. Recently, I highlighted one on preparing for the 2013 proxy season (link). This time, however, Latham produced a useful print article on venture loans.
A venture loan is a niche loan used by private companies, often venture-backed, to get capital which is less expensive than equity.
In the article, the authors provide a list of deal terms and valuable commentary as to what is most common, in their experience.
I was surprised to learn about a “change in management default”, apparently a frequent term. But the article covers many issues including typical loan maturities, covenants, collateral, prepayment provisions, etc.
Again, thanks to Latham & Watkins for continuing to provide helpful materials on the capital markets.
As always, please contact me to help your company to complete any capital market project.
“Preaching to the choir”. In this case, the choir is me. It seems that every commercial banker I meet, tells me to advise my clients, or anyone who’ll listen, to lock in today’s low interest rates.
When I ask, “what’s the risk?”, I get a lecture that we’re in an interest rate bubble and that despite the Fed’s announcement about the Fed Funds rate, business loan rates will likely rise, especially after the election.
When I confess that I not only believe them but share their concern, I ask “what should a company do to lock in these low rates?”
Since most companies have floating rate business loans, the bankers’ most common recommendation is to enter into a swap arrangement to fix the rate.
The cost of the swap, especially after tax, is considered very low cost insurance relative to the risk of a rise in interest rates.
A swap is not the only way, however. Some bankers recommended fixed rate term loans or even public bond issues if the financing is large enough.
One of my clients raised its first high yield bond last week so I’m doing my best to help companies to reduce interest rate risk. My banker friends would be pleased that their preaching paid off.
I can help your company to lock in low current interest rates. Please contact me. Thank you.
On Youtube, next to my posts about interest rate risk such as “Behind the Headlines on Interest Rates” were a series of videos which visually chronicle the history of US Treasury interest rates along the maturity curve for the last 50 years with commentary by Dr. Donald R. van Deventer, founder of Kamakura Corporation. Displayed above is one of the videos entitled, “50 Years of Forward Rate Movements”.
In a great example of a picture is worth a thousand words, or in this case, 12,300 days of data, one can quickly sense (i) historical levels of benchmark US Treasury interest rates, (ii) the variations from the expected or classical term rate structure (which is more common than one would think), and (iii) the amazing volatility in benchmark US Treasury rates.
As my post “Behind the Headlines on Interest Rates” explains, there’s more to what a company pays in interest rates than just the benchmark US Treasury rates but this reveals the variability in those benchmarks themselves.
The Federal Reserve announced that economic factors “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
This will, no doubt, influence interest rates through this period, but this is not the sole determinant of a company’s interest rate as noted in my post “Seems Smart Now“.
For example, the debt market for corporations, both large and small, is influenced by supply and demand factors in addition to the benchmark federal funds rate. The predicted reduction in demand for corporate debt by collateralized loan obligation (CLO) funds suggests that companies may see higher new issue interest rates. In contrast, any increase in demand by other lenders such as high yield bond and “relative value” investors may ease rates.
The recent post, “No Loan Left Behind“, by Randy Schwimmer of Churchill Middle Market Finance, now a unit of The Carlyle Group, describes these supply and demand forces at work on the larger size loan market (size above $100 million).
To support Randy’s view that high yield investors are supplying critical demand, this week one of my clients successfully priced its first high yield bond replacing other financing sources.
My message is that while Fed action gets the headlines, there are several other factors at work, behind the headlines, which influence a company’s debt rate.
Well, it’s the Fall of 2011, Wall Street has been highly volatile as fears of a new recession and disarray in the Eurozone dominate the news.
As I talk with clients and friends, the discussion always comes around to the question “now what?” What if my company needs capital? Where can I go?
First, there’s debt.
The debt markets are open for business. Based on my experience, finance companies and banks are lending. The public debt market is open too.
A borrower’s projections may get more “stress testing” now but interest rates are historically low.
Second, there’s asset sales
In part because debt is available, buyers are active. If your company needs to raise cash, you might consider selling a business.
I know companies who’ve raised cash in this manner. They’ve gotten good prices for the businesses sold and are now deploying the money.
Third, large cash-rich corporations may be a source of capital for your company.
Sometimes these relationships take the form of direct equity investments into your company but many times they take the form of JVs, licenses, cash advances or even simple grants.
These deals work when the relationship benefits the large company’s business, even if indirectly.
Lastly, don’t forget equity.
You may wish for higher prices when selling equity but you should also be pragmatic. You should ask yourself “how critical is the having cash now? What is the investment opportunity? Does it justify the cost of raising equity now?”
Again, my name is Dennis McCarthy. I’m happy to discuss funding options with you. My contact information is below.