Lessons from three companies whose equity, debt and bank credit transactions required flexibility, speed and more.
The scramble for liquidity during the pandemic underscored the need for treasury to be prepared—at any point—to snap into action and access capital or credit. And while each company’s circumstances are different, there are some lessons that emerged from this year’s financings that should interest almost any treasury team.
- At a second-half meeting of NeuGroup’s Life Sciences Treasurers’ Peer Group, three members described funding transactions involving debt, equity and a revolving credit facility. Larry Williamson, head of healthcare coverage at Societe Generale—the meeting sponsor—moderated their discussion.
- “Companies took appropriate actions in terms of managing their underlying business and undertaking financing to reinforce their balance sheets and ensure adequate liquidity,” Mr. Williamson said.
Be flexible, patient, unafraid. Volatile capital markets, illiquidity, fluctuating pricing and terms for revolvers created situations for some treasurers that required patience and flexibility.
- One treasurer needed to ensure his company’s acquisition strategy would not be jeopardized by a lack of funding. He had counted on expanding the company’s bank group in a previous year to provide a deep pool of incremental credit commitments. However, the pandemic undermined the critical size of that option and “we had to go back to the drawing board,” he said.
- The company “explored all corners of debt capital markets to see if we could structure something to preemptively reduce potential M&A execution risk” before initially moving toward a delayed draw term loan, to balance critical size objectives and the cost of carry.
- Then other corporates starting paying down revolvers, a positive for banks. Ultimately, the company decided on a “massive short-term revolver,” but had to pivot a number of times. After first being told banks wouldn’t do anything longer than 364 days, the company ended up with a two-year revolver with commitments 100% larger than the required facility size.
- Reaching what the treasurer called “an extraordinary outcome given prevailing market conditions” required going back to the board as the market outlook changed. “Don’t be afraid to go back if you can get a better deal,” he advises. “Don’t feel you’re locked into something and be willing to push internally if you can get a better outcome,” he said.
Don’t rule anything out. In March, as markets shuddered, another company’s senior management decided to say “no go” on a deal to refinance a security maturing in the fall. Waiting until May, the treasurer said he “threw all the spaghetti on the wall” as he looked at the cost of capital of multiple options and worked under a mandate not to affect the P&L.
- In the end, the company “fell back to something we had done,” a convertible bond that the treasurer described as pretty vanilla but required treasury to be flexible and do a seven-year deal instead of a five-year.
Be prepared, fast, coordinated and aligned. A third treasurer’s financing demonstrated the value of being prepared to act fast to take advantage of an opportunity by working closely and intensely with other finance functions and leaning on bankers and lawyers to get a deal done when time is tight. The multifaceted deal, which the treasurer called “grueling,” involved equity, debt and bridge financing. Takeaways:
- Don’t underestimate the amount of time it will take to produce and review multiple versions of documents. “We started as early as we could,” the treasurer said. “Thanks to the pandemic, everyone whose input was needed to get the financing done, including board members, was at home and available.”
- Get internal buy-in and work closely in cross-functional teams. “That’s the only way to do this,” he said. Real trust emerged between the team members as they came together virtually, led by legal and treasury.
- Be prepared to learn about the strength of your relationship with banks as you make them part of the deal team. When it came to bond allocations, “my goal was to make banks as least unhappy as possible,” the treasurer said, adding that everyone except the lead bookrunner ends up unhappy to some degree.
- Align on bank roles and titles with senior executives before they field calls from banks, making sure everyone internally agrees that the decisions are fair and equitable. “The management team stood firm,” he said, adding that through it all, “I was really thick-skinned.”
More lessons on banks and boards. Don’t rely solely on your existing banks and service providers for a deal that meets your needs but may not be to their liking, one member said. For his financing, the treasurer broadened his bank group, bringing in several new, non-U.S.-based banks to diversify lender behaviors.
- The same treasurer advised peers that members of your board may talk to members of other boards and could develop a fear of missing out—FOMO. That means treasury has to combat “doing something for the sake of doing it” (such as a bond offering) by having a lot of discussions about why “others are doing what they’re doing.” He added, “Always be prepared to talk about markets in general and relevant reference deals in particular.”
- Another treasurer remarked that “the board dynamic is interesting to navigate,” requiring treasury to align on expectations with the C-Suite and “hold the line” on decisions about the banking group and other matters.
Keep it quiet. More than one treasurer emphasized the benefits of keeping information under wraps until it has to be shared with a broader audience.
- “Confidentiality was key; if information leaked ahead of announcing to the market, there would have likely been negative impact on the execution of the transaction,” one member said.
- Another only kept the “lead left” informed up until the morning of issuance, saying, “We had been burned before when leaking affected pricing.”
