Management Accounting

Twice the Effort for a Revolver: A Good Deal

It took some doing, but Ducommun is among the few companies able to recently acquire a five-year line of credit with decent terms.
Sarah JohnsonJuly 2, 2009

Joseph Bellino, CFO of Ducommun Inc., has a new, rare prize he can use to show customers and suppliers that aerospace-parts maker is on solid ground, an envious position to be in during this recession. A recently signed deal with five banks for a five-year, $120 million unsecured credit line shows “that we’re going to be around to ship products,” he says.

Six months after beginning the process of lining up the funds — which included establishing three new banking relationships — Bellino notes that the agreement took twice the time it would have during better market conditions. “We feel this was almost a watershed event, to be able to do this during these difficult economic times,” he tells

Moreover, he’s one of the few finance chiefs able to feel they’ve gotten a decent deal from lenders. Used to give companies a liquidity cushion, revolving lines of credit are harder to come by these days — and the few deals that are getting signed are smaller, with shorter maturities and higher interest rates. Bellino was able to up his existing revolver by $45 million, not post any collateral against it, and keep it to five years. More typical are banks demanding secured revolvers that will last only one to three years, he says.

To be sure, Bellino had some challenges in getting the deal signed. He will be paying a higher interest rate, and he noted that he realized early in the process that “the pendulum had swung” in lenders’ favor compared to earlier this decade, when borrowers had the upper hand and credit was much easier to come by.

In the first half of 2009, banks issued $163 billion in new revolving lines of credit, down from $292 billion in the first half of 2008, according to new data from Reuters Loan Pricing Corp. Total issuance for 2008 was $455 billion, while in the prior three years it had exceeded $1 trillion.

Having a revolver is critical to compensate for the cyclical business of Ducommun, which makes components for commercial and military airplanes and generates cash during only half of the year. The company will use the revolver, which replaces a $75 million line that would have matured next April, to finance its working capital during the first half of the year.

The credit may also be used for acquisitions. Past December, the company drew down about $10.5 million to help with a $45 million acquisition of DynaBil Industries. Most of the deal was funded with cash.

For the new revolver, the company will be paying 250 basis points over LIBOR, rather than 175 under the previous deal. Totaling all the costs of borrowing over the life of the loan, Ducommon will be paying about 4% for the line of the credit, “which we think is very attractive,” Bellino says.

He says his company bucked the trend of poor deals from lenders because of Ducommun’s reputation, low debt levels, and focus on creating a win-win arrangement. The company looked at the deal as a way to forge new business relationships and considered how its potential lenders could benefit from working with the manufacturer, Bellino says. Bank of America is the lead bank in the revolver, which also includes support from Wells Fargo, Union Bank, U.S. Bank, and Northern Trust.

Ducommun was successful in convincing the lenders that it may be a good customer in the future for their more profitable, ancillary products, such as 401(k) services, treasury management, and corporate purchase cards. Ducommun has promised to first consider the five banks the next time it needs those types of services. Indeed, Bellino said the company convinced the banks that it views them as not just lenders but also service provider. “It’s a formula that works well,” he says.

In addition, Bellino says, his company was up-front and ready to freely offer up financial information at every banker’s demand. The lenders want to know how much cash flow their investment in Ducommun could produce, and Bellino advocated giving them as much information as he could to quell that uncertainty.

“When senior credit managers asked for additional information, we were focused on responding quickly, not defensively,” he says. “Their job is to find out where the challenges are and where the problems are. We provided the information openly and objectively. I think it makes an impression. If a company responds quickly, [the banks] know they can count on them to give timely information.”

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