How to use leveraged finance strategically

Lynn Norris : Welcome to Navigating Beyond the Expected, a podcast from Truist Securities.

When company leaders see opportunity, having the right capital available can determine whether they're able to act. Leveraged finance, generally debt raised for companies with below-investment-grade credit profiles, can provide valuable scale and flexibility, but it's important to consider more than interest rates and fees. Financing needs to support identified strategic goals.

I'm your host, Lynn Norris, and today we're talking with James Brett, head of Leveraged Finance Syndicate at Truist Securities, about how companies can use leveraged finance strategically, balance flexibility with investor expectations, and support long-term market access. James, thanks for being here.

James Brett : Thank you very much for having me. I'm excited for our chat.

Lynn Norris : Me too. We've talked a lot on this podcast about capital access in a lot of different forms, and one theme keeps coming up: the money has to serve a purpose. I mean, nobody raises capital just for the sheer joy of raising capital. So where does leveraged finance fit? When does it become the right tool for what a company is trying to accomplish?

James Brett : There's all sorts of reasons why a company would use the leveraged finance markets to raise capital, and each one will present kind of a different strategy. Companies do acquisitions all the time, or they might raise money for growth capital, for example, a new plant, a new facility, or R&D. There are transactions that fund shareholder returns, like dividends. There's also just very simply refinancing of existing debt. And each one of those stated reasons has different tools available that might fit best. And in leveraged finance, we don't just use one tool. There's multiple different products that we provide to our clients and provide access and help them navigate to solutions for. So that can run anywhere from bank or relationship capital to the institutional term loan market. We can get into the high-yield bond market, which is both secured and unsecured. It has senior or subordinated.

There's all sorts of different flavors. All of this is married up to: What's the company trying to accomplish, right? The way you might find financing for an acquisition is very different than the way you might approach financing that's just trying to push out an existing liability. And so each different situation that somebody will need to access capital for gets a tailored solution if we're doing it the right way.

Lynn Norris : I want to clarify one thing from the definition in the intro. We're generally talking about companies with below-investment-grade credit profiles, but there's some nuance there, right? Who can actually access leveraged finance?

James Brett : A company that would have investment-grade ratings would typically access the investment-grade market, either through loans or bonds. So it would be a little bit different profile. There's, of course, companies that are not rated that can access leveraged financing capital. So it doesn't have to be specifically somebody who is rated. Not all the same products are available for companies that are not rated. So it's a very important distinction. One of the first things we talk about with companies who are potential first-time issuers or first-time borrowers in the marketplace, if they don't have ratings today, how would we work with them to get ratings if we want to access a product that requires that?

Lynn Norris : So once a company knows what it wants the capital to accomplish, how do you start matching that goal to the right leveraged finance structure? What are the things you're weighing?

James Brett : There's a lot that goes into it, and this is not always something that you can figure out on your own. It goes back to: What is your intended goal? What are you trying to raise money for? Financing acquisitions will be very different than if you're trying to finance a dividend, for example. And the things that we take into account are: What is your time horizon, right? Do you need debt that will go short-term or long-term? That's one piece of information. Second, is this something that is meant to be permanent capital or temporary capital? Permanent capital we tend to think of in terms of three, five, seven, eight years, even 10 years in some instances. Temporary capital, which oftentimes is used for acquisitions, we think of things like bridge loans that are very short term. So we talk about what is the stated purpose of what you're trying to accomplish.

Then it needs to also marry up with your strategic goals. There's a difference between making an acquisition, especially if it's a large acquisition, what we call transformative, something that really changes the fundamental nature of your business and how you're going to operate. Something like that, you want to make sure you have flexibility to integrate and find synergies in the transaction, and you need operating flexibility within that to accomplish all of your goals. That's very different than if you have a loan that's coming due in 12 months and you just want to push out the maturities, right?

Lynn Norris : Right. And ownership structure has to matter here too, doesn't it? A public company and a private-equity-backed company may be looking at very different timelines and very different definitions of flexibility.

James Brett : A public company behaves very differently than a company that's been acquired by a sponsor or a financial buyer, private equity, so to speak. They will have very different goals and very different timelines of how they're trying to accomplish those goals. And so we need to make sure that the products that we put in place to finance the strategic goals of the company marry up with what the expectations of the shareholders are. The most common example of this is call protection. Think of your mortgage, right? Whenever you want to pay that down, you just pay it down.

Then there's other debt, like in the bond market, that has what we call “call protection.” They have non-call periods or non-call premiums. So just for example, if it's a call premium of 105, that means if you want to pay back $100, you have to actually pay down 105. That's compensating those creditors for the risk that they're taking. Obviously, if you have a very short-term exit strategy or you want to refinance that debt in the very near term, you don't want call protection because that's just added cost to your whole transaction. Companies with longer time horizons and strategic goals may say the call protection, because it decreases over time, by the time I'm going to need to refinance that debt, the call protection will have dissipated to the point where it's no longer meaningful to me. So I'm willing to live with that in order to get some of the other benefits of the product. These are all things that we discuss with our clients on an ongoing basis.

Lynn Norris : That's a lot of moving pieces. I mean, for a company coming into this market for the first time, what does that runway look like? Are we talking weeks, months? How early do they need to start?

James Brett : There's no set rule. It depends on the company. If you need to get ratings, that adds a significant timeframe to the equation. Then there's marketing materials we put together to show the debt to investors, and those are different with the various markets that we go to, right? When we sell to relationship banks, you oftentimes have a bank book that's pretty simple. In the bond market, we have to prepare a formal offering document that complies with SEC rules. And so these things can be very different.

There are also other factors to think about. So if a first-time issuer is a private company and maybe they've never raised money in the institutional markets before, they need to think about how they tell their story to institutional investors. That's very different than a company that's already a public entity. Maybe they've done an investor marketing process before, maybe to a different audience, and they may never have financed in the leveraged finance markets before, but they have materials already and they have an idea of how to go about presenting their story to the marketplace, and that's a very different exercise.

So all these things come together, and each one has slightly different timeframes. Generally speaking, you can access the markets in as quickly as two weeks for some issuers. Sometimes it can take upwards of two months to get everything prepared if you're a first-time issuer and we're doing legal documentation. It just really depends on what the background is, what the situation is, and what the capital tool that we're using is.

Lynn Norris : You mentioned the importance of telling the company's story to investors. The numbers are the numbers, of course, but beyond the basic credit metrics, what makes that story credible? What makes an investor think, "Yes, I understand this company, and I understand why this financing makes sense"?

James Brett : There's the basic credit metrics investors are looking for: leverage, operating trends. Obviously, a company that's growing fast and has a very high gross margin or EBITDA margin or very high free cash flow, that's more attractive than a company that's not really growing and is a very low-margin business. But these are all things that are fundamental credit analysis that investors do, and there's not much that a company can do to change their fundamental credit metrics. At a certain point, your debt to EBITDA ratio or your leverage ratio is what it is.

But what we like to also talk to the market about is, what differentiates us? What is our special sauce? How do we communicate why what we do is important and why what we do is sustainable and has growth prospects? Investors want to hear that full story. We juxtapose that with what are your strategic goals in the financing? If you're doing acquisitions, you want to have operating flexibility to combine businesses or integrate businesses and find synergies, things like that. How do creditors get comfortable with giving you the flexibility that you need? These investors are fundamentally predisposed to want to be your partner. They don't want you to fail. So how do we talk to the market about, here's the flexibility that this company needs, and here's why we think you should give it to them? It's all about being honest and upfront and thoughtful.

Lynn Norris : So once you've figured out which leveraged finance structure best fits the strategic goals, the next question is what that flexibility is going to cost. If I'm comparing mortgages, I'm probably looking at the rate and the fees and calling it a day. With leveraged finance, what belongs on the cost side of the equation besides the obvious numbers?

James Brett : It's a terrific question. People oftentimes compare mortgages, for example, just based on the rate and the upfront fees or whatever fees are associated with, because across banks, all else is very equal. But if, for example, one bank offered you 25 basis points less on your rate, but said, "We won't let you paint your house anything other than black," you'd probably say, "Well, I don't want to be tied up not being able to paint my house whatever color I wanted to. So I'd willingly pay another 25 basis points in order to be able to do whatever I wanted with my house." That's the consideration on a much larger scale, obviously, that we talk about with our clients, that interest rate and fees are certainly an important part of the equation, but if you don't have the flexibility to operate your business the way that you want to or need to in order to maximize value for all shareholders, we're giving too much preference to the debt.

A good example is companies that want to do joint ventures. This is very common in the healthcare sector, for example, where companies might partner with doctors or for-profit companies might partner with not-for-profit companies. If they need the flexibility to do that because that's the way you provide the best care and get the best returns for your company and for all of your shareholders, then we need to make sure that your credit documents provide you the flexibility to do that. And that's the case that we help our clients make.

Lynn Norris : Of course, if I'm running the company, my instinct is probably, I'll take all the flexibility, thanks. But more flexibility can come with a price. How do you help a client separate what they genuinely need from what would simply be nice to have?

James Brett : Sure. So if you're leasing a car, they might say you get to drive 10,000 miles a year. Or a second lender will say, "We'll let you drive 12,000 miles a year." Well, if the interest rate is the same, sure, I'll take 12,000 miles. That makes sense. But if they say it costs you an extra 1% on your lease rate to get to 12,000 miles, there will be some people who will say, "You know what? I'm going to drive 12,000 miles. I need that." And there will be other people who say, "I'm probably not even going to drive 10,000. I'm not going to pay for that." So we talk to our clients all the time about things that probably you can get for free, and we just need to identify them upfront. Then there are things that probably cost you something, and here's an estimation of how you should think about that cost.

Sometimes people say, "That's worth it to me. I need that." And sometimes people say, "That's not worth it to me. We don't need that." Sometimes we go into market, and we talk to investors about it, and we get real feedback on what the cost is. There is flexibility to make changes while we're in market to cater to what the investors or our client needs based on market feedback. So we always try to stay nimble and thread that needle of what's the best answer for our client that also works for the marketplace.

Lynn Norris : And you’re the person standing in the middle of those two perspectives. Borrowers want room to operate, investors want appropriate protection. So talk to me about what that back and forth actually looks like from the syndicate desk. How are you translating between the two sides?

James Brett : Yeah. So on the syndicate desk, I spend about half my time talking to issuers, borrowers, all of our external clients, and then I spend the other half of my time talking to investors. So I get information from both places, and I get to know what everybody's preferences are. And then the job is to match that up. So when we talk to our clients, our borrower clients or our issuer clients about here's what the market is expecting, here's what they're charging, it's because I've had those conversations with institutional investors over and over. So we're constantly updating and keeping those conversations fresh so that we're able to provide our clients the most up-to-date market information and advice about how they can be successful.

Lynn Norris : Do the two sides ever surprise each other? I'm curious about a first-time borrower getting a close-up look at what investors care about. Is there usually an "Oh, I didn't realize that mattered so much" moment?

James Brett : Always. These are people with different jobs in the world, and so they don't spend a lot of time in the other side's shoes. If you're a CEO or a CFO and I say, "Here's what I need to operate my business," it's hard for them to understand why an investor or a lender would say, "I don't want to give you that flexibility because it makes my investment more dangerous." If you're a lender or an investor on the bond side, you might say, "Why would a management team choose to go down this path? As I see this, here's what they should do." And that could be in timing, could be strategically, but they're not operating the business. They don't see the industry the same way that our issuer, borrower clients do. And that's a big part of our job, bridging that communication or vision gap and trying to help people see here's exactly why we're doing it this way.

Lynn Norris : Well, given that, let's look beyond the deal that's sitting on the table today. Getting that financing done is obviously the immediate priority, but access to capital is a lot more valuable if it's still there the next time you need it. What should companies be doing now to protect that future access?

James Brett : Getting the financing done that's on the table is of paramount importance, and we always keep an eye on that. But if we do a financing that provides one-time access but doesn't provide you with flexibility to grow the company or have additional access going forward, we might have a successful transaction today that turns into a real challenge a year or two, three down the road. So our job is to help all of our clients think through strategically, not just what does the here and now look like, but what do the next three to five years look like, and how do we prepare for that?

There are a lot of different ways that we do that, as you can imagine. There's specific flexibility that we build into documents about how you access capital and what your ability is to raise new money. There's segmentation that we do between things like secured and unsecured, senior subordinated, so that we diversify the sources of capital that you might be able to have. I think companies are really good about planning for "if everything goes right, here's what I'm going to do." But what if things don't go to plan? What if they go to half of your plan? What if they don't go to plan at all? Where do we end up, and how do we figure out where you're going to access capital? There's a very famous saying in finance; it's “Raise money when you can, not when you need to.” If at ever one point you really, really need money, it's probably very expensive. So we need to scenario-plan for what might happen that's off of our immediate path. And that's what we try to be upfront about, not just this deal, but what's the long-term plan?

Lynn Norris : That makes the story feel less like a one-time pitch and more like an ongoing relationship. So how do you help them tell the right story to debt investors and then keep telling it credibly after the deal is done?

James Brett : A big part of this, especially for first-time issuers or borrowers, they're not used to having these conversations. The story that you tell to equity investors about, here's all my growth prospects and how I'm going to increase earnings per share, that's not the same story that debt holders want to hear because they're more focused on, how do I get my money back? So we do help a lot of companies figure out what the right strategies and strengths to tell the market are so that the narrative we're giving the market is the most effective.

When we're talking about maintaining access to capital and thinking about future plans, you need to come up with a plan for how you're regularly going to communicate with these investors. Because they don't just give you money and then say, "See you in five to eight years, and I hope you pay it back." They want to talk to you pretty regularly. Are you comfortable sharing all this information with people that we're telling them right now? Are you comfortable sharing it with them on a quarterly basis? Are these the right metrics of the story of your business? Because if we get out three quarters from now, six quarters from now, 12 quarters from now, and the metrics that you measure your business by have changed, we need to change the story that we're telling to the market. So that's oftentimes things people haven't really thought about: how we're going to communicate with the market, not just today, but on an ongoing basis.

Lynn Norris : Yeah. Even with a good plan and a good story, the market can still move underneath you. What strategies give a company the best chance of maintaining access when conditions get unpredictable?

James Brett : The easiest one is managing maturities. It's different having all of your debt come due at one time in one year than having it split up into bite-sized pieces that are easier to refinance. We talk about diversification of capital sources. You can certainly raise all the money you need in the loan market or all the money you need in the bond market, or all the money you need in the relationship bank market. And there are a lot of companies that choose to do so for very specific reasons, and it might make sense.

But over the long term, it's better to have access to as many markets as you can so that it gives you the ability to tap into whatever market is in best shape at a moment in time. But the simplest way to ensure that you have access to capital over the long term, we tell people: Communicate with your investors. Keep them apprised of what's going on with your company. Give them access to information. Because if they're up to speed, if they understand what your business is doing, they're more in tune with your financing needs and better able to anticipate what might be coming.

Lynn Norris : When markets get choppy, there's a very human temptation to say, "Maybe we'll just wait until this settles down." Sometimes that probably is the right move, but waiting has a cost too, doesn't it? How do you know when doing nothing is prudent and when it's just adding risk?

James Brett : Sometimes the right answer, and we tell our clients this, sometimes the right answer is to do nothing. Of course, that introduces more risk of the longer you wait, the closer you get to maturity. And the closer you get to maturity, the less flexibility you have. At a certain point, you need to refinance it somehow. You need to do something with it. Different companies will have a different point of view on that. Some companies will say, "I have two years to go. That's plenty of time." Other companies will say, "Two years to go is really close. I'm nervous." It will depend on the circumstances and a lot of times it's better to wait, get a little bit closer to your maturity rather than to rush into a choppy market. So it's different for everybody.

Lynn Norris : For someone listening who hasn't entered this market yet, but can see leveraged finance becoming useful down the road, what would you want them to do now, before there's an urgent need sitting on their desk?

James Brett : I always say, "Let's start the conversation early." I've had conversations with numerous companies over the years where they say, "I'm still probably a year away from doing anything." No problem. Let's talk about what the art of the possible is. Let's talk about what you're thinking about, and I can give you some helpful hints to steer the way you should think about accomplishing your goals from the financing market's perspective.

One of the things we pride ourselves on here at Truist is helping you think through a holistic solution. Not just the here and now, but how do we set your company up for long-term success? And that involves not just me; that involves all my partners across the bank that are part of the coverage team. Financing in the leveraged finance markets is one part of it, an important part of it, but is not the only one. How you navigate the capital markets has a direct impact with lots of other parts of your business. So the earlier we start the conversation to identify the goals and the potential impediments to those goals, the better chance for success we have.

Lynn Norris : Well, James, you've made a pretty complicated set of decisions feel much less mysterious. There are a lot of variables, but the through line seems pretty straightforward. Know what you're trying to accomplish, think beyond today's transaction, and start the conversation early. Thank you for walking us through it.

James Brett : Oh, happy to do it, and thanks very much for having me. This has been fun.

Lynn Norris : But you don't get to escape just quite yet. We know some more about leveraged finance now, but we want to know a little bit more about you. So I've got a few rapid-fire questions, or rapid-ish if necessary.

James Brett : OK.

Lynn Norris : Are you ready?

James Brett : Sure.

Lynn Norris : All right. First, what does your ideal free Saturday look like?

James Brett : Yeah, there's a lot of things I would like to do. I would love to have some beautiful weather to play golf and spend some time with my family. I have kids that are very involved in sports. I have a wife that I love sharing a bottle of wine with. We like to cook together. But I'd be lying if I didn't say it wouldn't be ideal to start the day with a nice round of golf in the morning.

Lynn Norris : Yeah, I'll allow a multipart Saturday. That sounds fun. All right, next one. What's a household chore you genuinely don't mind doing?

James Brett : Cooking. I actually really enjoy cooking. I find it very relaxing and exciting, so it is something that I have never really viewed as a chore. I do like to eat, so it's something that I view as fun. It's technically a chore, it needs to get done, but I'm more than happy to do it.

Lynn Norris : Well, cooking does have the advantage of ending in dinner. All right, last one, and you can take more time with this one if you'd like, what's one way you try to go beyond the expected, in work or in life?

James Brett : I've always approached things in my life with a team-oriented approach, and I've always had a number of terrific mentors at every stage of my life, both personally and professionally, people who have invested a lot in me. So I've always tried to approach my interactions with a team goal-oriented approach, meaning how do we all get the best out of a situation? I think if everybody took that approach, how do we get the best instead of how do I get the best, I think we'd all be in a much better spot.

Lynn Norris : You are absolutely right about that, James. Well, that was great. James, thank you so much for being here on Navigating Beyond the Expected. I hope we'll get to have you back soon.

James Brett : Great. Thank you very much for having me. I appreciate it.

Lynn Norris : Listeners, thanks for joining us on Navigating Beyond the Expected. Each month, we bring you new conversations with Truist Securities experts on the issues shaping corporate and investment banking. Subscribe today so you never miss an episode and check out more Beyond the Expected insights, videos, and articles at truist.com/beyond. You can also subscribe to I've Been Meaning to Do That, the podcast from Truist Wealth at Truist.com/DoThat. I'm Lynn Norris. We'll see you next time.

Truist Securities is the full-service corporate and investment banking arm of Truist Financial Corporation. With a rich history extending back more than 125 years, Truist Securities offers a robust capital markets and investment banking platform that includes a comprehensive array of strategic advisory, mergers and acquisitions, and capital markets capabilities for corporate and institutional clients, including sales, trading, and research services in both fixed income and equity. The firm also provides corporate finance, asset finance, risk management, liquidity, and treasury management solutions to meet clients' full spectrum of financial needs.

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