Finding the long-term financing that best fits your needs.
Companies typically utilize long-term financing once they have demonstrated scale and stability. The infographic below details the ten key considerations for businesses interested in adding long-term financing to their capital structure.
Long-term financing helps drive growth strategy, address internal events, such as shareholder activity, and supports balance sheet risk management. It is more closely aligned with the capital needs of growing businesses. The most important factors to consider when thinking about long-term financing will vary based on the size and credit profile of each issuer, but they are generally as follows:
1. Overall Debt Funding Need
Companies typically elect to have some level of debt at all times for capital structure optimization and tax purposes. To avoid over capitalizing on long-term debt, companies should confirm that level of ‘core’ debt they prefer not to prepay. It’s not that companies may not prepay long-term financing, it is designed not to be prepaid but can be via a ‘make-whole.’ Companies, therefore, would want to make sure they have the right balance of long-term financing in their capital structure.
2. Relationship with Lender
With long-term financing, it is helpful for companies to have a sense for the desired nature and extent of their relationship with their long-term lender. Typically, they would have a choice of a single or small investor group with a relationship focus, or a more broadly spread capital markets issuance. Depending on whether a company accesses the long-term market through a direct private placement, club private placement, syndicated private placement or public bond, oftentimes there is a meaningful impact on the relationship the company will have with its lender(s).
3. Risk Profile and Leverage Appetite
The risk profile and leverage appetite of a business will determine which long-term financing markets are available to a company, such as an investment grade private placement, a below investment grade private placement, or a leveraged loan/high yield bond.
4. Public Disclosures and Ratings
Public disclosures are an important consideration for companies interested in long-term financing. For example, public bond issuances will require information to be disclosed publicly as well as a public credit rating. Conversely, private debt (particularly direct) maintains privacy.
Different long-term financing markets have different covenant requirements. For example, private placement financing has financial covenants, whereas public bonds typically do not. Private placement covenants typically mirror those of banks, which many companies would already be familiar with.
6. Currency Type
When thinking about long-term financing, a company will want to determine if they need their provider to have multi-currency capabilities. This would ensure a company can access the various currencies they may need from one lender.
7. Interest Rate Type
When looking at long-term financing, a company will want to determine what they want their mix of fixed- versus floating-rate debt to be. Fixed-rate debt helps to mitigate interest rate risk, should rates rise in the future. Additionally, private placements are priced off of treasuries, so they also add diversification away from any single market risk.
8. Debt Maturity Profile
It is beneficial for a company to match their debt maturity profile to the needs of their business. Long-term financing from the private placement market offers substantial flexibility over maturities and amortization, whereas the public markets do not.
9. Speed of Execution
It is worth considering the speed of execution a company needs from their long-term financing provider, including how quickly a company needs the funds and whether they understand the time scales of the various types of debt issuances.
10. Diversification of Capital Structure
A company should think about adding types of capital to their balance sheet that serve different purposes, creating a capital structure that is optimized to fit the long-term vision for the business as well as positions the company to take advantage of investment opportunities that could arise months to years down the road.
There are many considerations for issuing long-term financing, Prudential Private Capital can help guide you through each one, ensuring your financing best supports the long-term success of your business.
Interested? We would be happy to discuss how long-term financing could work for you.