Palladium Equity Partners, an investment firm that targets companies in manufacturing, services, food, consumer, healthcare and media, saw American Gilsonite as an ideal investment. American Gilsonite’s products are used mainly by oil and gas industries to make drilling mud for exploration, but they also have applications in the manufacture of ink and asphalt, and in foundries. These are all growing industries—nevertheless, the challenge lay in finding favorable financing terms to acquire a company with an annual revenue of less than $50 million, at a time when lenders are increasingly reluctant to base their terms on future earnings.
 
“Many lenders would shy away from lending on a cash-flow basis to such a small company,” admits Bobby Lau, senior vice president in CIT’s Atlanta office. “But we had faith in the company’s ability to control its market and maintain its EBITDA because of the high and ongoing demand for gilsonite.”

Lau explains that an Atlanta-based investment bank, Breckenridge Group, which had an ownership stake in American Gilsonite, called on CIT to provide the financing to support the acquisition.
 
“When Palladium made the winning bid, we put aggressive financial structuring in place,” says Lau. “The transaction was for a $40 million facility and consisted of a $34 million term loan and a $6 million line of credit for working capital purposes.”

CIT and GE Capital provided equal shares of the senior debt, and Prospect Capital added mezzanine debt.
 
“Because of the nature of the property to be acquired, and because today’s lending environment is stricter than we’ve seen in many years, we had to do intensive due diligence,” recalls David Perez, managing director of Palladium Equity Partners. “We needed to make certain not only of the company’s assets but also of their mining rights, their mineral reserves, the size of the returns, and any questions about whether we’d have clear title to access those returns. We also had to look carefully at all the end-user industries, and we had to find out about American Gilsonite’s competitors and about substitutes for its product. It was a more laborious process than usual—but the tough questions posed by the lenders and our ability to answer them gave us a very high level of comfort.”

By organizing a generously sized structured loan on prudent but aggressive terms, in the midst of a strict lending environment, CIT helped Palladium complete a transaction that was risky enough on its face to make some lenders wary but was in fact certain enough that the numbers made sense. This gave Palladium the ease and swiftness of execution that leveraged buyouts require, while ensuring the agility of the company’s capital overall. Many lenders count on prior relationships for ongoing business, and CIT is no exception. In this case, what made the deal work was CIT’s strong relationship with Breckenridge and other lenders, all of which enabled CIT to put together a winning capital structure. The result was a new sponsor relationship in Palladium.
 
“A lender like CIT can get an early look at the deal, surround it, do the due diligence,” Lau concludes, “and we can identify those deals where it makes sense to be aggressive on structure and multiple.”