Arms' Length Analysis Results in Private Debt Being Issued at Appropriate Market Rate
Client: Oil & Gas Drilling Equipment Manufacturer
Challenge: Review Loan, Set Interest Rate in Arm’s Length Transaction
A family that owned a private company manufacturing pipes and fittings for the oil and gas drilling industry wanted company management to pay off a bank term loan and replace it with its own privately issued term loan due to an economic downturn in the industry. The company, which had previously engaged AccuVal to conduct a business valuation, asked our professionals to review the integrity of the new loan and guide the company in setting an appropriate interest rate for the debt.
AccuVal Approach
Because of the relationship between the company and the family owners, AccuVal explained that the new loan would have to be structured as an arm's length transaction to avoid even the appearance of a conflict of interest. This ensures that both parties are acting in their own self-interest and are not subject to any influence from the other party.
To set an appropriate interest rate, AccuVal needed to assess the company's credit risk, its financials and its income stream. We evaluated conditions in the oil and gas drilling industry in which the company was operating and studied credit markets for current lending trends. We also pulled data from comparable loans in the industry, including the yields being returned, and compared our database against what similarly priced loans were selling for. After synthesizing all the data gathered, we produced a reasonable range of interest rates for what a market-rate, arm's length loan would command in the current marketplace.
Bottom Line: Debt Financing Proceeds; Company Poised to Weather Negative Economic Conditions
Both company management and family owners ultimately agreed with AccuVal's recommendations and were comfortable proceeding with the new arm's length agreement terms. They were able to issue the debt at an agreeable market rate, enabling the company to better weather the industry downturn.
The AccuVal AdVantage™
Firm support for important financial decision-making. The ability to anlayze credit and debt markets and apply it to new and untested transactions. Broad experience in business equity valautions. Decades of understanding balance sheet integrity. That's the AccuVal AdVantage™ at work.
© 2013 AccuVal Associates, Inc. All Rights Reserved