Banks position themselves as trusted advisors with the capability of facilitating large financing deals on behalf of their clients. While banks are capable of providing financing advice, they often have interests that conflict with the interests of their clients. Banks are in the difficult position of serving their clients while also maximizing their own profits and protecting their own balance sheets.
In addition, banks and their broker-dealer affiliates also serve investor clients, whose interests are not aligned with the corporate issuer. When those goals come into conflict, how will the banks’ corporate clients be affected? Redbridge fills this gap by providing objective third party advisory services. By maintaining independence and serving only corporate clients, Redbridge is positioned to act as part of the client’s corporate finance team in full alignment with our clients’ interests.
Who Is Your Trusted Advisor?
Often times, corporations rely heavily on their banks to provide M&A financing. Due to the confidentiality and time-sensitivity of the negotiations, as well as the need for committed financing, the banks providing the financing have negotiating leverage over their clients. Since these transactions are infrequent, the corporation may not have recent market knowledge or have the time to identify all the different terms they could negotiate in such a financing. The lead bank’s main goal in those situations is to “secure the deal.” In order to reduce execution risk (and facilitate its job!), the bank is almost mechanically enticed to structure a deal with the widest pricing and most restrictive terms, making it easier to sell in the market. Unfortunately, this leaves the corporate client paying more than necessary, including advisory fees, and getting less flexibility in the financing than they need. The bank’s syndication process can also lead to an imbalance in the profitability between lenders, creating a wallet share issue for the client going forward. As an independent advisor in M&A transactions, Redbridge’s global team of experts helps clients identify these imbalances, negotiate better terms with their advisor, and ultimately save money through reduced advisory fees and more favorable lending terms.
Appropriately Positioning New Financing Needs in the Capital Structure
Redbridge reviews contracts prepared by our clients’ bank, analyzes the terms, and makes recommendations. Our in-depth global knowledge of common market practice and understanding of the acquisition loan market makes us an ideal partner for M&A financing and RCF financing deals. We review our client’s business needs for financing and quickly identify the terms and conditions of a deal that our client can negotiate.
Banks often overlook terms that can reduce client’s costs, such as baskets for alternative financing and flexibility in terms, or fail to consider scenarios that have negative impacts for clients but do not affect the bank’s profitability. For example, the consequences of bonds being negatively notched by rating agencies may be detrimental to the client but have little impact on the bank. At Redbridge we know what to look for, and we are able to quickly help our clients correct these types of issues with their banks.
Additionally, we analyze Risk Adjusted Return on Capital (RAROC) for each underwriting bank to ensure that the deal does not create a significant imbalance in the bank group. While the lead bank must get paid for the underwriting risk they are taking, they often overreach. When a deal is a ‘slam dunk’ sell to the market, the leads have overcharged the client. A good transaction will give the lead some room for maneuvering, but be priced tightly enough and with terms flexible enough to make the lead earn their underwriting fees.
Proactive Management of the Rating Agencies
Surprisingly, a step often overlooked in debt financing engagements is communicating with the credit rating agencies. For deals that will be financed in the public markets, ratings are an important factor in pricing for the deal. The timing and content of the communciation with the agencies could significantly impact the way they view the transaction. If a company does not communicate with the credit agencies, the agencies may not be prepared to absorb the full picture and could issue a rating (and a press release) without proper input from the corporate side. By the same token, a positive, well-documented view can be a huge selling point! Redbridge understands the importance of communicating with the rating agencies and can manage the process from start to finish.
Our key recommendation to our clients is to seek independent advice from an advisor who knows the market and whose interests are aligned with yours. A company like Redbridge can act as a sounding board, helping you challenge your lead bank(s) on the pricing and terms and conditions of the deal with a focus on your best interest. We can help you avoid pitfalls, communicate with the rating agencies, and gain clear unbiased visibility into the fees and profitability of the banks arranging the deal.
The Insights from the Field Series
The Insights from the Field is a monthly content series of industry hot topics. In each monthly installment, we share Redbridge knowledge directly from the experts. Visit the Insights section of our website regularly to read about other trending issues.