Written by a corporate banker at a major North American bank

What keeps corporate and commercial bankers busy when they are not doing annual reviews? Deals!

Servicing a portfolio encompasses a variety of loan transactions, which are outlined below:

New Debt/Credit Facility

These are the most exciting transactions for corporate and commercial bankers. New loans and credit extended means that the loan book grows (year-end bonuses and reviews are based on growing the loan book) and more profit (commercial bankers will generally make tidy returns on capital on their loans while corporate bankers may as well or at least anchor a strong capital markets relationship).

A completely new loan or credit agreement is crafted with the help of lawyers (internal and external, with lenders counsel and borrower’s counsel), credit is adjudicated by a risk management division and then a closing dinner is set up.

Banks offer various types of credit facilities contingent on company needs, including revolvers, term loans, and letters of credit. The most common needs are general corporate purposes (funding the business), capital expenditures, and acquisitions.

However, the really exciting transactions have to do with acquisition finance and major capital expenditures for projects (which includes project financing).

This is typically done in conjunction with other capital markets financing as the company wants to keep a prudent capital structure – or at least swap out the bank debt for more permanent capital in the form of bonds.

The terms and agreements detail amount borrowed, loan duration, repayment terms and default provisions. Companies can also have multiple credit facilities outstanding – including more than one revolver. They can have a 3-year revolver, a 5-year revolver and a 364-day revolver with a term out option. They can have additional revolvers tied to particular projects that they are spending money on.

Loan Extensions

For general corporate revolvers, it is onerous to enter into an entirely new credit agreement (owing to the large amount of time in negotiation and lawyer fees involved), so when companies start to approach maturity on their credit revolvers, they will ask the banks to extend under the same terms.

So for example, the maturity may be simply pushed back from 2019 to 2020 for a simple one year extension.

Sometimes, if companies feel that the bank market is frothy and that they can lock in attractive pricing today, they may ask to extend their revolver out to the maximum (usually 5 years) even though they may only be 2 years into the loan agreement.

Extensions are not like annual reviews, which are just an internal memorandum – when you kick out maturities by any time period, this means an extended commitment of bank capital. The treasury of the bank has to fund the loans/commitment to the client, so there must be a risk memo submitted and approved before an extension can occur. For deteriorating credits, concessions may have to be made to the banks so other amendments will follow the extension.

Extensions that do not come with any such baggage are sometimes referred to as a “straight extension”.

Loan Increase/Upsized Credit Facility

As corporates grow, they may want to bump up their revolvers so that they can have more liquidity. Obviously, this requires the bank to set aside capital and accordingly they will have to be cleared by the credit division.

However, these are generally not hard to push through if the company is growing because the credit metrics will improve and the size component makes it easier for the risk adjudicators to swallow.

Credit Agreement Amendments

For all of the terms and conditions of the original credit agreement, there may be some that become obsolete or onerous. Some do not reflect the financial health of the company and are therefore irrelevant.

For example, if a company has a debt to capitalization requirement that is based on shareholders’ equity, but because their share price is below what they view is the intrinsic value of the firm while they are generating very strong free cash flow, it makes sense to amend this financial covenant otherwise their debt/cap may near their covenant when they are actually in great financial shape.

Sometimes, however, the company feels that certain terms and conditions are restrictive while the bank’s lawyers want them to stay because it protects the bank’s position as a lender. In these cases there is a little more push and pull, where commercial bankers want to get some sort of concession for relinquishing this term – but in a frothy bank market where corporate banks are also competing for capital markets business, the power is in the hands of the borrower.

Credit Agreement Refinancing

A company may restructure or refinance when a credit facility matures. Although not as easy as an extension, amended and restated credit agreements based very much on the original terms and conditions of the now expired credit agreement will be a lot cheaper than a totally new facility.

Refinancing could lead to a more favourable interest rate and greater access to capital.

Covenant Waivers

A waiver is the agreement of the bank to overlook the borrower’s failure to meet one or more loan covenants. This provides the company an additional layer of security in the event of loan breach or default.

So usually, when a company feels that they may push up against one of their financial covenants such as interest coverage or debt/EBITDA when the quarter ends, they will ask the administrative agent/agent bank to get the lenders to provide a waiver. Now, if the company is more or less an alright credit the banks generally do this no problem, especially if it is a large capital markets issuer or an M&A hotbed.

However, if the company starts asking for a waiver on a regular basis this could be trouble…

Sometimes you will have more than one transaction. For example it could be Extension + Upsize. Or an amended and restated credit agreement with upsize.