Long Term Financing Case Study

Really Investing for the Long-Term: A Case Study

9 PagesPosted: 18 May 2012  

Date Written: Spring 2012

Abstract

Many public company decisions continue to be dominated by short-term thinking, which can lead to negative long-term consequences for investors. Pension funds have a duty to act in the financial interest of their beneficiaries as investors, but they can achieve this only within a framework of good corporate governance and long-term sustainable investing. This article details the steps that Dutch asset manager PGGM has taken in this direction by creating the Responsible Equity Portfolio, a dedicated equity portfolio with a long-term investment horizon that integrates financial, environmental, social, and governance factors with active ownership. The article sets out the investment philosophy, implementation processes, and results of this unique strategy.

Keywords: Active Ownership, Long-Term Investing, Pension Fund, Responsible, Sustainability

Suggested Citation:Suggested Citation

van der Velden, Alex and van Buul, Otto, Really Investing for the Long-Term: A Case Study (Spring 2012). Rotman International Journal of Pension Management, Vol. 5, No. 1, p. 50, 2012. Available at SSRN: https://ssrn.com/abstract=2061696

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$8 Million Combination A/R, Inventory, Equipment and CAPEX Facility For Manufacturer With No Coverage

The London Manhattan Company recently found and developed a combination of revolving and term debt (including a CAPEX line of credit) for a manufacturer with headquarters in the Western US secured by a lien on all of the borrower’s assets. The borrower could not provide debt service coverage due to operating difficulties, and was required by the new senior lender to put a stipulated amount of equity or subdebt into the company at the closing.

The Situation:

This manufacturing borrower had total annual revenues running just under $20 Million. The company faced strong competitive pressures in its industry.

The Combined Financing:

LMC found a package of new financing with the following attributes:

Revolving Line of Credit: $8 Million
A/R Advance Rate: 85%
Inventory Advance Rate: 60%
Excess Availability Requirement At Closing: At Least $1 Million
Term Loan (Revolver Sublimit): Lesser of $800,000 or 80% of Auction Value of Borrower’s Equipment Amortized Over Sixty Months
CAPEX Line (Revolver Sublimit): $750,000 Subject to Conditions
Loan Term: Three Years
Collateral: First Position Lien On All Corporate Assets
Prepayment Penalty: Yes; 3% of Loan Amount in Year 1, 2% in Year 2, 1% in Year 3
Subdebt or Equity Requirement: Mandatory Capital Infusion Required At Closing

$6 Million Bridge Loan For Manufacturer With Cash Flow Difficulties

The London Manhattan Company recently found Real Estate and Equipment Bridge Financing for a manufacturing client located in the Eastern US. This financing provided much needed liquidity for the borrower in a rapid time frame. We also arranged permanent financing to take out the bridge at the end of its term.

The Situation:

The borrower was a historically profitable manufacturer with annual sales running at just under $20 million. The company lost some major customers and experienced severe operating difficulties during a two year period preceding the bridge financing. As a result, the borrower needed additional liquidity quickly. The bridge loan provided immediate relief from cash flow difficulties, and follow on permanent facilities from other lenders took out the bridge lender.

The Financing:

This Bridge Financing had the following attributes:

Amount Financed: Approximately $6 Million
Facility Structure: Bridge Loan
Collateral for Bridge Loan: Real Estate and New and Used Equipment
Term: Twelve Months
Bridge Loan Takeout (Exit): Provided by Permanent Real Estate and Equipment Financing from other lenders

$11.25 Million Refinance Fixes Inefficient Capital Structure

The London Manhattan Company recently found $11.25 million in new working capital for a large materials processor located in the western US. This refinancing of all the client’s asset classes (real estate, equipment and a/r and inventory) replaced an extremely inefficient capital structure produced by a long series of “one off” loans. The package of new real estate loans, a/r based revolving debt and equipment financing provided greatly increased working capital for this successful company at reduced debt service levels.

The Situation:

This borrower had a long history of successful operations with annual revenues running in excess of $20 million. The company operated on three separate parcels of real estate, which were not properly leveraged for working capital purposes. In addition, the parcels had little in the way of permanent improvements, given the nature of the business.

The company had existing revolving debt of only $2.3 million secured by accounts receivable and inventory. In addition, the borrower had an inefficient array of 18 separate equipment and other unsecured loans. The new real estate, revolving and equipment term debt financing found by LMC paid these off, and provided generous availability for future expansion of this profitable firm.

The Real Estate Financing:

LMC found new Real Estate Financing with the following attributes:

Loan Amount: $3.75 Million
Property Financed: 3 Separate Parcels
Loan Term: 25 Years
Loan To Value: 75%
Payments: LIBOR Based Monthly Principal and Interest Payments
Personal Guarantees: Yes

LMC found new Revolving and Equipment Term Debt with the following attributes:

Amount: $7.5 Million
Loan Term: 3 Years
Equipment Portion Amortization: 5 Years
Secured By: Accounts Receivable, Inventory and Equipment
Personal Guarantees: Limited PG of $3.5 Million
Other Features: Small Letter of Credit and CAPEX Facilities Included

$4.8M Refi For Metal Fabricator With Covenant Default Pays Off Existing Lender

New Tombstone Financing Details:
Borrower: Metal Fabricator
Amount Financed: Approximately $4.8 Million
New Revolver Amount: $3M
New Equipment Term Loan Amount: $1.8M
Collateral: First Lien On All Corporate Assets
Equity Infusion From Owners: Required

The Details:

The London Manhattan Company found a $4.8 million facility to refinance a metal fabrication firm located in the midwest. The company fabricates custom metal products and store fixtures, and has quality long term national accounts.

The financing paid off the existing lender, but required an equity contribution by the owners at the closing. The deal was structured as a revolver and a senior secured term loan secured by equipment, and all corporate assets.

The Situation:

The borrower was a very successful metal fabricator with current annual sales running at just over $15 million. Due to the financial meltdown, the company violated a revenue covenant in its loan agreement with the existing lender. The company was also hurt by slow payment from its customers during the faltering economy.

The Financing:

This Term Loan Financing had the following attributes:
Borrower: Metal Fabricator
Amount Financed: Approximately $4.8 Million
New Revolver Amount: $3M

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