Building a Strong Syndicated Credit Facility

Companies are increasingly turning to the syndicated loan market to fund acquisitions or pay down more expensive debt.

In late 2004, II VI Inc., a Saxonburg, Pa.-based manufacturer of products that incorporate synthetic crystal materials, was seeking to acquire thermal technology provider Marlow Industries Inc. The opportunity was too good to pass up; Marlow Industries' thermoelectric cooling technology would greatly extend II VI's ability to grow and fabricate crystals, recalls Craig Creaturo, II VI's CFO and treasurer.

To pay for the deal, Creaturo needed to beef up a $45 million line of credit his company had negotiated with a syndicate of four banks in 2000. He worked with these lenders to boost the facility to $60 million, which enabled II VI to complete the acquisition. "We could [distribute] the risk among the banks, so the deal would allow us to grow," he reports. "And we were able to bring together the dollars pretty quickly."

Many other organizations are turning to the syndicated loan market to finance acquisitions or pay down more expensive debt. Overall syndicated loan volume grew from $1.02 trillion in 1999 to $1.35 trillion in 2004, according to research from New York City-based Loan Pricing Corp., a company that analyzes the loan market. That's a 32 percent increase. (See Syndicated Loan Market Soars.)

Midsize companies -- those with annual revenue of up to $500 million -- borrowed $168 billion through syndicated deals in 2004, up 57 percent from the previous year's $107 billion. Activity among larger organizations tracked with this midmarket boom.

A large part of the explanation for the market's rapid expansion is the fact that many banks' financial picture has become distinctly rosier in the last 18 months. They have money available, and they are looking to lend it.

At the same time, many institutions have tightened their lending policies, and they are more reluctant to hold large amounts of debt from a single issuer, according to John Fox, executive vice president of Memphis, Tenn.-based First Horizon Corporate Financial Services, a division of First Tennessee Bank. In fact, many banks today won't lend a company more than $35 million, notes Richard Rodgers, managing director of corporate lending with Stamford, Conn.-based GE Commercial Finance. By joining a syndicate, a bank can fund larger ventures without compromising its lending policies.

A surge in refinancing is also fueling the market uptick. In 2004, refinancing deals accounted for about half of middle-market syndicated loans, according to Loan Pricing.