When it comes to negotiating credit facilities, every company has different preferences and concerns, noted Mike Sommer, assistant treasurer at The Scotts Miracle-Gro Co., the world’s largest marketer of branded consumer products for lawn and garden care. “For different companies, different things can be more valuable: it may the size, flexibility negotiated into negative covenants, the leverage ratio, or shaving basis points off the pricing grid,” he said.
Scotts’ syndicated facility includes a collateral package of hard assets and pledges of subsidiaries’ equity. “Our agreement allows for us to borrow at the parent level and at multiple U.S. and non-U.S. subsidiaries,” Sommer said. That ability to borrow at the subsidiary level was part of the structuring negotiations with the banks. The five-year, $1.7 billion credit facility includes over 20 banks. Because the lawn and garden business is profoundly seasonal, the company borrows heavily leading into the spring selling season and collects receivables in June and July.
Because the facility is not considered asset-based lending, there’s no provision in the credit agreement that compels the company to report the value of the collateral, which makes things a lot simpler, according to Sommer. Whether a deal is secured or not, the negotiation of the covenants and compliance with baskets or any restrictive language are a big part of the process. “You know you’re going to have covenants. Some will be standard. But how they’re structured is a big part of the conversation,” he said. “It’s been a big part in terms of all the deals I’ve dealt with.”
At Scotts, the compliance certificate is filed quarterly. That’s when the company affirms its debt ratios, etc. “We also look at the negative covenants and test those during the course of the quarter. You have to know your triggers and limits,” Sommer said. That means a treasury representative needs to be involved in any business change or acquisition conversation so that they can assess how the change will affect the company’s compliance with its debt agreements. If the transaction is forecast to have no impact, it’s left at that. If there’s a gray area, or it’s open to interpretation, it will be brought up for discussion with the lead bank to make sure everyone is on the same page. Obviously if there’s going to be a clear breach of covenants, the company will seek a waiver or amendment.
Sommer offers the following best practices when negotiating and complying with credit agreements:
- Be prepared. “Know what you want,” he said. “When we have conversations with banks, particularly on the credit side, we look at all the alternatives: revolver, bank term loans, institutional term loans, bonds, private placement. You get the best outcome if you’re rigorous about what serves you best,” he said.
- Insert some competition. Creating some competition among banks is often the only way to improve the terms of the deal. “The classic example is conducting an RFP,” he said. In its most recent renegotiation, Scotts did an informal RFP and put together a short document that outlined what it wanted and what is important to the company. It then asked the banks to provide a proposal and pricing that helps the company reach those goals. “I believe we got a better result versus starting negotiations with only one bank from scratch,” said Sommer.
- Cultivate your relationship with outside lawyers. Develop a relationship with a law firm that has current and frequent syndicated credit agreement experience—and stick with them. Sommer has been able to maintain continuity with the company’s external credit agreement counsel, even as the company has shifted some other legal work among firms. “Their main job is to put the commercial agreement we negotiated into legal terms,” he said. Equally important, however, is that the lawyers know the company and companies like it and see deals in the market all the time. “They know the relative positions of strength and should have a good sense for the current state of ‘market’ terms for various provisions of the agreement,” he said. “It is useful to have someone who’s had experience in these facilities with similar organizations.”
- Clearly define terms. It helps to tie the covenants to existing financial metrics, even if they’re not based on GAAP. “An important part of the negotiations is clearly articulating the definitions of the terms,” Sommer advised. “Be very specific. If it’s debt to EBITDA, what is debt? Is it debt at a certain point in time? Is it average Debt? A good credit agreement will have very clear definitions,” he said.
A longer version of this article will appear in an upcoming edition of AFP Exchange.