Three corporate treasury executives provided financial professionals with some helpful tips on securing and negotiating credit facilities during a session at the 2015 AFP Annual Conference in Denver.
    
John M. Wagner, CTP, senior vice president, treasurer for HarbourVest Partners, LLC noted that the “golden rule” of putting any kind of credit in place is to finance in advance of your need. “You don’t want to be asking your banks when you really need credit, or, chances are, you’ll pay more for it,” he explained.

There are a variety of solutions available, and treasurers will need to work carefully with their banks to determine what works best. The banks will review your organization’s credit quality to narrow down what type of deal they can provide. They’ll also consider your legal structure to understand which legal entities have the most liquid assets and can provide the most collateral.

In any discussion with your banks, pricing is a key consideration, Wagner added. “There will be all kinds of different fees,” he said. “So if you have three or four proposals, you’ll have to line those proposals up and do a very detailed analysis of how much this is really going to cost you.”

Once you’ve determined the banks you want to work with, it’s time to nail down the details. “It’s time to get specific on the term sheet, the commitment fees and the fee letters,” Wagner said. “It’s time to get down to brass tax and ask more detailed questions about really what they’re going to be able to do for you and get realistic timelines on how it’s going to move forward.”

Once it’s time to meet with the banks, whether it’s in person, on the phone or via webinar, it’s important to make sure senior management is on hand. “You want to have your most senior management, perhaps even division heads, to speak to the business so that your bank can become familiar with your company. The more your bank knows about your business, the more they can advocate for you,” Wagner said.

Of course, the most arduous part for the treasurer is negotiating the actual credit agreement. “There can be documents that are hundreds of pages long and they can have onerous dependencies from one section to another. So you’re going to live with your lawyers and with the document. So the more you know about the credit agreement, the better you’ll be,” Wagner said.

He added that covenant compliance is incredibly important in this process. “You are committing your company to hold to a certain set of operating covenants, as well as reporting,” he said. “You’ll have to work with accounting to figure out how you’re going to report on all those functions, but the key consideration is that you’ll also have to work with your senior management and operating management so that they understand what the constraints are of your credit agreement.”

Wagner noted that treasurers need to do constant “reality checks” throughout the process. Early on, banks might be overly aggressive with what they say they can do. “But they may not understand one aspect or another of your business. Or it could be that the market won’t support the type of agreement or pricing that the banks have positioned you for. So you need to constantly be doing reality checks and keeping the management teams on what the reality is,” he said.

Treasurers also must keep legal fees in mind, Wagner cautioned, as the borrower is responsible for both the banks’ legal fees and its own legal fees. “So you can find yourself in a situation where you’re paying two sets of lawyers to argue with each other over what you consider to be meaningless things,” he said. “I’ve been pretty successful in getting the bank to establish and adhere to a budget. I’ve been a little bit less successful in managing our own attorneys to a budget and keeping them in line. And even if you have a legal counsel internally, you will need an external budget because they’ll have to rely on outside attorneys. It can be a pretty sizable amount of legal costs.”

Stacey L. Desrochers, CTP, treasurer, Bruker Corp., stressed the importance of understanding what type of credit facility your banks are interested in. “Some banks prefer a term loan portion with an amortization schedule. Others are fine with a committed facility. So you just need to understand what it is that your banks would prefer as you start to structure your facility,” she said.

Desrochers added that if the company has any foreign borrowers or subsidiaries, treasurers need to understand their local requirements. “You need to work with your legal people for those, but also your tax folks to make sure you don’t run into any dividend issues,” she said.

Lastly, she stressed that treasurers need to understand the covenants and the baskets in the credit facility. “You’re going to have to live with them for the next three to five years,” she said. “So you really need to understand what all the definitions mean and what you can and can’t do. This is a living document you’ll need to refer back to again and again.”

Tracy A. Sorrell, CTP, director, global treasury, Haemonetics Corp., agreed that treasurers must know their covenants inside and out. “The devil’s in the detail,” she said. “Pick through it. Take notes, write notes. Write down what is included, and maybe some definitions, because you will forget.”