Case Study: $10MM Line of Credit

Background

This early stage biotech company sought to expand its line of credit and extend its cash runway. Debt Advisors Group* assisted them from start to finish, including needs evaluation, bid solicitation, proposal assessment, terms negotiation, competitive analysis and summary recommendation. This case study illustrates the key financing goals, decision factors and overall process. The results achieved by this company are the product of their unique credit profile and the risk appetite of the lenders considered.

Client Profile

Industry: Bio-Tech
Stage: Early
Investors: Over $50MM from top tier VCs
Burn: Approximately 20 months

Previously Installed Debt Facility

The company had established a $2.5 million equipment backed line of credit during their initial start-up period. The line was a standard venture bank line, characterized by the following:

• Lien Coverage: First security lien on all corporate assets except intellectual property, which requires a negative pledge
• Additional Requirements: All primary depository, operating, and securities accounts kept at bank, with bank having right to set-off without notice (possible sweep)
• Material Adverse Change Clause: Throughout drawdown period and term
• Rate: 36 months at floating rate of Prime plus 0.25% with 8% end of term balloon and resulting internal rate of return of 8.78%
• Soft Costs: Capped at 25%
• Warrant Coverage: None
• Prepayment: Borrower may prepay without penalty or premium with thirty day notice

Evaluation

Debt Advisors Group analyzed the outstanding loan looking for areas to improve the structure. Debt Advisors Group determined that the full cash collateralization and right to set-off made runway extension impossible. In essence, the company was borrowing its own money. Additionally, the blanket lien severely limited all future financial flexibility such as bridge financing. Based on this evaluation, the company decided to include a refinancing of this loan with other current debt requirements.

Debt Needs

With the infusion of a fresh round of equity financing, the company looked to extend its runway through leverage. The company sought debt financing of $10 million:

• Takeout of existing financing – $2.5 million
• Large tenant improvement (soft costs) – $3.5 million
• Significant European based lab assets – $2 million
• 2004 Equipment capital expenditures – $2 million
• Total: $10M takeout

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