Loan syndication to meet progressive financing needs
As businesses grow and their capital needs expand, their sources of funding often progress as well. Dealers’ capital needs typically evolve from a single bank (or a handful) all providing individual bank financing to loan syndications with multi-lender credit facilities.
Loan syndications have a record of providing capital to other industries, but only recently have they played a meaningful part in private, auto dealer financing. The number of loan syndications for private dealers has increased significantly as auto retailers’ needs for growth capital have soared with the consolidation we are seeing in the industry. Syndicated facilities allow larger players a more efficient way to buy smaller family-owned dealer groups.
Loan syndication provides growth-minded dealer groups with a committed source of capital that allows them to execute seamlessly on strategic initiatives. This funding approach consolidates the three primary components of the capital structure—floor plan, real estate, and blue-sky loans—into a single credit agreement with multiple lenders sharing commitments on a pro rata basis.
The multi-year, capital commitment offers additional capacity to fund ongoing growth initiatives, providing peace of mind while making the funding strategy easier to execute. Although multiple lenders participate in the syndicate providing the loan, dealers only need to negotiate with the administrative agent bank that manages the entire syndication process and coordinates with the other lenders.
The syndication process can be more complex and take multiple weeks when coupled with real estate due diligence—the most time-consuming element. There are also upfront costs to document and execute a more sophisticated capital structure. Plus, syndicated loans typically include safeguards that limit how dealers can use the borrowed funds.
The step beyond loan syndications: high-yield debt
The challenge today is that neither single bank financing, nor multi-lender capital sourcing via syndicated credit facilities, can support capital demands at the level many large dealer groups require. Banks have a limit on their lending capacity. And large, private dealer groups may reach a point where their capital needs exceed both what single bank and syndicated loans can provide.
To fund additional growth beyond what syndications can offer, dealers can turn to high-yield debt to supplement (or replace) other capital sources. Issuing high-yield debt gives dealers access to a broad and deep pool of institutional investors who can tap into larger sources of capital. This potential funding stream reduces dealers’ reliance on a single type of financing and introduces capital that comes with fewer covenants and restrictions than bank funding, while providing a fixed rate instrument with no amortization requirements.
