Advance Bookings - Forward Start Facilities
SOURCE: CHARTERED BANKER, JUNE / JULY 2009
The uncertainty among the banks has created very nervous borrowers, particularly those who are seeking to renew facilities in 2009. An emerging trend throughout the early part of this year has been a movement by borrowers who are worried about availability and pricing, to refinance existing syndicated loans by entering into arrangements known as “forward start” facilities. These facilities enable borrowers to secure long-term debt well ahead of the normal review date; and provides an opportunity for the bank to support its preferred customers.
The forward start is basically a committed facility used to refinance an existing loan on maturity, the key difference being that it is signed some time before the final repayment date on the existing loan. The forward start does not replace the existing loan, which stays in place, but is kept on standby pending maturity of that existing loan.
Given continuing liquidity constraints, and restrictive lending conditions, this could be a solution for companies which are otherwise in good shape and continuing to comply with their existing facility terms.
Without the approval of all existing lenders, the borrower can't get an extension of existing facilities, but with a forward-start agreement those lenders that want to continue to lend can make a separate agreement which will begin when the old loan expires, at which time any lenders who do not wish to participate can step out. The lenders under the forward start will therefore include only some of the existing lenders, and not all, as otherwise the existing facility could simply be amended and a forward-start would not be required.
Forward start deals are potentially advantageous to companies, allowing them to secure long-term future funding at a known price, and to banks, which will adjust their pricing accordingly to ensure that they can cover their costs, and generate some profit. The banks will typically receive fees under the forward start for the period from its signing date until the start of its availability period, in addition to the margin and fees payable under the existing facility, which continues until its scheduled maturity date.
Forward starts have become popular with borrowers (mainly multi-nationals) and banks alike over recent months. However there is a competing view among some lenders that these deals can in fact represent risky long-term bets that allow companies to secure financing at below market price, and without any incentive to bring down overall debt levels. Some deals for non-UK companies have been agreed several years in advance, taking little account of how market conditions might change.
There has also been a suggestion that larger companies are effectively testing the strength of their bank relationships by pushing through competitively priced forward starts on immature loans to secure medium-term liquidity to the detriment of smaller borrowers with fewer financing options.
That said, while some banks are keen to exit relationships at any cost and would rather reserve the right to walk away than support a forward start, banks agreeing to fund on this basis are receiving large fees and a price increase that may serve to limit their losses on existing loans, as well as increased future business.
It remains to be seen whether forward start will push into the wider market. The benefits to borrowers are clear with the reassurance of financial support enabling borrowers to concentrate on their trading business; while banks with an appetite to continue lending and entering into these deals will have an opportunity to retain, and in some cases, win, profitable business.
author: alex innes