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Case StudiesOne-stop Financing
A one-stop financing describes a loan that provides all the funding needed for a given transaction, whether it is an acquisition, strategic investment or recapitalization. The one-stop financing concept emerged in the 1980’s because of banks providing senior loans that did not meet the full capital needs of a transaction. This left the acquirer with a capital gap to be filled with equity or mezzanine debt. In the 1980’s, finance and insurance companies began offering cash flow-based loans larger than bank loans. These loans blended a senior as well as a subordinated piece in their structure resulting in loans equal to 3.5 to 4.5 times EBITDA. These loans became known as one-stop financings because all the capital is provided by one lender. The one-stop financing approach is favored by private equity funds as well as founder-owned companies due to the ease of raising all the capital from one source. This streamlined the overall financing process and resulted in less intercreditor complexity than a 2-lender deal.
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The Benefit of One-Stop Financing
On a head-to-head comparison with a two-loan structure, one stop financing provides more capital as the lender’s position is derisked as the only lender in the capital structure. By eliminating a senior lender, the borrower creates more comfort for the one-stop lender allowing them to lend at a higher multiple. This extra capital is helpful for a growing company. One-stop loans are easier and faster to raise than raising capital from two separate lenders. There is only one due diligence work stream and one lender to answer questions from. The borrower usually receives a delayed draw term loan from a one-stop lender giving them more financing for future acquisitions. This is very valuable for companies planning to grow through acquisitions. One stop financing also is helpful funding smaller deal sizes where a two-lender approach is not feasible. Because one stop financing providers are usually mezzanine debt lenders, the company benefits from the more mature and long-term mezzanine debt perspective. Most one stop-financings are structured with heavily back ended principal repayment which helps the company’s cash flow.
The Downside of One-stop Financing
One stop financing interest is higher than the blended interest rate of a two-loan structure. One-stop lenders price the senior debt at a mezzanine debt level which creates more cost for the borrower. While the blended interest rate is higher, the principal repayment is lower than a two-loan structure. Eliminating the senior lender in the transaction exposes the company to direct lender actions, due to the lack of subordination provisions. If the Company is in trouble, the one-stop lender can be more aggressive and drive for changes more easily than in a two-lender structure. Due to their larger loan hold size from the outset, one-stop lenders tend to behave in a more binary way than lenders in a two-party structure. If the company performs well, the one-stop lender is highly supportive. If the Company is average to underperforming, the lender tends to not want to stay in the deal.Frequently Asked Question
1. Do one stop lenders expect to receive equity warrants as part of their deal?
Depending on the risk of the deal and the amount of equity invested, one stop lenders can ask for equity warrants or equity co-investment.
2. What is the size range needed to get a delayed draw term loan?
Companies with EBITDA greater than $7.5 million are good candidates for a delayed draw term loan.
3. How large does the loan have to be to attract one-stop financing?
The revenue should be $30 million or higher, and the EBITDA should be $5 million or higher.
4. How much faster does the loan close than a two-loan structure?
A one stop financing moves 20% faster than a two-loan structure.
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