Debt Refinancing – Don’t get caught out

As interest rates continue to rise it is not just mortgage holders that are finding it difficult to replace their maturing loan facilities.

Lenders are understandably becoming increasingly cautious and selective.  Corporate borrowers can find that they are not automatically able to refinance or roll forward maturing loans.  Facilities taken out 4 or 5 years ago were structured in a very different economic environment, and the cashflow pressures and prospects for Borrowers are now markedly different, making financial covenants very tight.  Interest cover ratios, in particular, may need loosening to take account of the new rates.

This brief note sets out some of the things that Borrowers that are facing a refinancing event might think about.  In every instance it pays for a Borrower to engage with the issues and talk with its Lenders to explore potential sustainable routes forward.

Refinancing Options

Any Borrower that has a facility that is up for refinancing and is worried that they will need to soften their current covenants might consider a number of alternatives, such as:

• Adjustment of terms – the Lender might be prepared to adjust the financial covenants or change repayment profile amounts to give a Borrower more headroom or flexibility (or to match revised and realistic cashflow expectations). This might be in exchange for a fee, or an increased margin, or for additional security.  If the Borrower can make the proposition of lending to it more attractive to the Lender, then it will have a better chance of success.
• Consolidation – if a Borrower or a Group of companies has more than one loan, then it might make sense to combine them into one, using any headroom in one of the loans to ease the restrictions in the other. If the loans are with different Lenders, there are likely to be legal costs involved in transferring them to a single Lender, or to set up a “club” of Lenders, but having one loan arrangement (and set of terms to comply with) going forward might also make things easier administratively.
• Hedging and fixed rate products – these financial products can create cashflow certainty which is often attractive. Again, there will be costs involved to put them in place, both the cost of the product itself and “break costs” in the event that it needs to be unwound early at some stage in the future (eg on a sale).
• Re-bank – Lenders change their policies and lending targets from time to time, and individual bankers tend to move between institutions much more frequently than in the past. A Lender might have been keen to do business in a particular sector five years ago but may no longer be looking to lend to that sector today.  A sympathetic and understanding relationship director may have moved to a rival institution.  Changing a main lending relationship is not always easy and can take some time/costs, but it might be worth exploring if the Borrower would get a better deal and more support as a result.

Seize the Initiative

Engaging with your Lender early on can help; credit teams can take time to change loan profiles and your relationship manager will need to be able to back up and explain any proposals for refinancing, so it is worth spending the time to discuss them thoroughly.  If a Borrower has been historically punctual in providing financial information and responsive to requested from its Lender (ie been a “good” borrower), then the Lender is more likely to be sympathetic to proposals

Summary

If you require advice on an existing debt facility then please do get in touch with the FSP Banking and Finance team.  We are experienced in refinancing transactions, restructuring loans and the many issues that arise and would be very happy to discuss any of the issues covered in this note.