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The Loan Road Ahead: Steep Prices May Linger Longer Than Short Tenors

By June 11, 2020 June 22nd, 2020 No Comments

Post-pandemic advice from U.S. Bank for treasury teams: keep close to your banks.

Unlike the booming bond market, corporates still face restrictions on loans, and it may be awhile before pricing returns to pre-pandemic levels. At a recent NeuGroup meeting for assistant treasurers, U.S. Bank provided participants with insights into revolver drawdowns and what to anticipate when refinancing or seeking new debt.

Revolver pricing leaps. The volume of revolving-credit drawdowns—once taboo—has hovered at over $250 billion since leaping to that level in mid-April.

  • A plurality of drawdowns by volume (42%) has been by companies rated ‘BBB’, followed by ‘BB’ (24.9%), ‘B’ (10.6%) and ‘A’ (8.5%), according to U.S. Bank.
  • Highly-rated borrowers issuing incremental short-tenor, drawn facilities saw pricing jump more than 40%, and well over 100% for undrawn ones, except ‘AA’ which increased 86%.

Restrictions will persist. Libor floors became prevalent early on, said Jeff Stuart, U.S. Bank’s head of capital markets, and several structural features have since emerged, such as restricted payment tests on dividends and share buybacks, and anti-hoarding provisions requiring that a portion of drawdowns be used to pay down debt.

  • “I think they’ll be here for a while,” said Mr. Stuart, responding to a question whether such changes will apply to new issuances or executing an “accordion” option to increase loan size.
  • Pricing will stay elevated as well. “That’s what we’re going to see for some time,” Mr. Stuart said.

Some good news. Of 156 deals since March 23 tracked by U.S. Bank, only five new-money deals achieved tenors longer than a year; four were unrated and two secured. Eight “amends and extends” were longer than a year, and all 13 of those deals were in May.

  • “The world fell out of the five-year and dramatically increased the 364-day,” Mr. Stuart said, adding longer tenors will likely return to pre-pandemic levels sooner than pricing.

Some advice. Given banks’ “shock” at the rush to draw down revolvers, Mr. Stuart said, for the foreseeable future it will be harder to do multiyear facilities as well as accordion and incremental financings without impacting pricing on entire deals.

  • Banks are squirrely now, saying no to easy deals but agreeing to difficult ones. “It’s very difficult to predict what they’ll do, so this is a time when you need to be as close to your banks as ever,” Mr. Stuart said.
  • He anticipates greater confidence to lend next year and potentially improvements come fall, but “If you don’t have to do a deal now, don’t do it.”

No more stigma. Asked how drawing down a revolver influences banks’ view of the borrower, Mr. Stuart said initially he was perturbed at the lack of trust that the funding request implied, but soon realized how boards applied pressure to bolster liquidity.

  • “It used to be the worst thing a corporate could do, drawing down its back-up revolver, but I don’t think anybody is looking at it like that now,” he said.
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Antony Michels

Author Antony Michels

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