Many companies use senior debt capital as their primary source of funding, here’s why.
For most companies that take on leverage, the first, and often only debt that they're going to raise is senior debt capital. Senior debt capital is versatile; it can be used for short-term purposes, such as day-to-day operations, or it can be used for longer-term purposes, like acquisitions or significant liquidity events. Also, there is a variety of senior debt capital sources, securities and structures available to companies, which can be combined for a wide range of transactions.
Below are 7 common uses of senior debt capital:
1. Day-to-Day Operations
All companies need capital to fund day-to-day operations, or working capital, and if they aren’t funded by internal cash flows alone, businesses often use short-term senior debt capital to meet their operational needs.
Example: Integrity Gaming was looking to create more financial flexibility in their capital structure to support ongoing investments in their business. They ultimately received a ‘one-stop’ financing solution that consisted of a senior secured revolving credit facility, a senior secured capital expenditure facility, senior secured notes as well as senior subordinated notes. The new debt structure not only provided Integrity with the liquidity and flexibility they needed both on a day-to-day basis and for the long-term, but also freed up cash flows for their shareholders.
2. Debt Refinancings
Debt Refinancings are commonly done using senior debt capital to pay off or replace existing, potentially high-cost debt. As companies grow, they may take advantage of lower interest rates or more attractive terms that the market could offer over time. Refinancings using senior debt capital can help decrease the financial burden on a company’s debt capital structure, redirecting cash flows to other business needs, or terming out short-term bank maturities with longer-term obligations that may be a better match for the asset life or duration of forecasted cash flow. Long-term, fixed-rate senior debt capital can also be utilized to term out revolvers as well as help mitigate interest rate risk for the long term.
Example: GPT Group, a diversified Australian REIT, needed long-term capital to continue to solidify its presence in the Australian market. GPT Group had previously issued in the U.S. Private Placement market through agented transactions, but ultimately obtained senior unsecured notes directly from Prudential Private Capital to support its long-term business strategy.
3. Organic Expansion/Growth Capital
Using senior debt capital for expansion and growth capital could help companies achieve their goals for organic growth in a capital and cost-efficient way. Senior debt is often the lowest-cost alternative for raising capital to spend on new production facilities, new technology implementation, and other investments. It can also be employed to enter new markets by financing new product developments, acquiring customers, or expanding into new geographies.
Example: MGP Ingredients had previously used a combination of cash flow generation and borrowings under its bank credit line, or revolver, to fund a warehouse expansion project and build up an aged whiskey inventory. MGP decided to source capital that would better correspond with the long-term lives of these investments as well as to term out a portion of their revolver borrowings. Thus, MGP opted to establish a shelf facility with Prudential Private Capital, consisting of long-term, fixed-rate senior debt. Additionally, the financing could be used to facilitate MGP’s future investment in capex and their aged Whiskey inventory.
"We are very pleased that the new credit facility and fixed-rate term loan will provide MGP with additional flexibility to support our long-term growth initiatives and enhance shareholder value." - Gus Gruffin, President & CEO, MGP Ingredients, Inc.
Senior debt capital can also fund acquisitions. Through acquisitions, companies can access adjacent markets, diversify their customer base, or acquire complementary products or technology. Raising senior debt for acquisitions is an inexpensive and efficient way to enhance the return on equity of the acquisition as well as reduce the equity capital outlay required.
Example: Mesilla Valley Transportation (“MVT”) sought to reduce their number of lenders and simplify their debt structure to better prepare for potential acquisitions. To accomplish this, MVT set up a senior secured term loan with Prudential Private Capital, secured by tractors and trailers. As a result, MVT now has the funding needed to carry out their acquisition strategy with a more streamlined capital structure.
5. Share Repurchases
Share Repurchases, or stock buybacks, can be appealing to both publicly-listed companies targeting EPS accretion as well as privately-held businesses who want to repurchase shares that have fallen out of the hands of the majority owners. These transactions are easily accomplished using senior debt capital.
Example: Copart was looking to obtain senior debt financing for a share repurchase and execute the transaction quickly. They approached Prudential Private Capital with their financing need, who worked with them to provide a substantial dollar amount with a flexible structure. Copart ultimately completed the transaction with its bank group, Prudential as well as one additional institutional investor, and received the capital required to repurchase the shares.
6. Dividend Recapitalizations
Dividend recapitalizations involve raising new capital to restructure the debt and equity mixture on a company’s balance sheet and are an ideal use case for senior debt capital. Senior debt can also be used as a capital-efficient means to fund a special dividend for personal liquidity or estate-planning needs (for private companies) or to return capital to shareholders in the absence of good acquisition prospects or capital projects (for publicly-listed companies).
Example: In response to a new federal tax law, Great Clips wanted to convert from an S-corp to a C-corp, which would allow them to make a one-time, tax-free dividend. Great Clips required a quick turnaround in order to meet the federal deadline on the opportunity. In the end, Prudential Private Capital provided Great Clips with senior secured notes, enabling them to meet their deadline as well as further diversify their capital structure.
7. Going Private Transactions
Going private transactions take place when a publicly-held company delists its stock and becomes a privately-held company and are often done using senior debt capital. Going private transactions can occur when the majority of publicly-held shares or assets are purchased by management (MBO), the employees (via an ESOP transition), or by an individual.
Example: After having created an employee stock ownership (ESOP) plan to hold a minority stake in the company’s stock, the founder of Hypertherm made the decision to transition the company to a 100% ESOP ownership, for the purpose of succession planning. Hypertherm was then introduced to Prudential Private Capital, who structured a financing package that included a senior secured term loan as well as a Pru-Shelf facility. Hypertherm also obtained a shorter-tenor financing from their bank, which provided a senior secured revolver and an additional term loan. As a result, Hypertherm received the capital needed to finance the 100% ESOP conversion that would help solidify its long-term leadership and ownership strategy.
While senior debt capital is usually the most cost-effective source of financing for a company, it can also be the most versatile, satisfying a wide variety of needs.
"The team at Prudential Private Capital spent the necessary time to get to know Hypertherm and our business. They were able to provide financing that met the needs of multiple stakeholders, and were a pleasure to work with." - Carey Chen, Vice President & General Manager of Light Industrial Business, Hypertherm, Inc.