Bank capital challenges and economic recovery are calling the tune on revolver tenors, pricing.
The bank loan market is back in action, but even strong, investment-grade (IG) companies may want to step lightly since lenders still face challenges.
- Bankers explained in a recent NeuGroup meeting that during the onset of the pandemic, banks’ internal credit ratings for clients often fell further than public rating agencies’, requiring lenders to set aside more capital and potentially shore it up by raising equity or selling assets.
- Rolling over a 364-day facility should now be a walk in the park, the head of bank loan capital markets at a major global bank told members. Some borrowers with five-year credit facilities that aren’t coming due are avoiding the market, “not wanting to walk into elevated pricing and/or shorter tenors,” he said.
The tone has changed. Just a few months ago, the banker would have told even highly rated IG companies that the five-year market was not in reach.
- Now, the five-year market may be available, but banks are “respectfully” requesting borrowers to hold off re-upping longer-term facilities annually unless they are coming due, the banker said.
- The capital requirement on a new five-year facility is 100% on day one and steps down each year, “So pushing [out loan tenors] now when there’s still stress in the financial system makes it more difficult for banks,” the banker said.
The brighter side. Most IG borrowers, except those in the travel, oil and gas, and retail sectors, have repaid most of their drawdowns, and consequently pricing has come down. One example:
- A low IG borrower put in place an eight-month, $1 billion revolver at the height of the crisis, with covenant protections including duration fees and spread steps.
- Pricing was 40 basis points over Libor undrawn, 200 basis points drawn, and 40 basis points in upfront fees; its recent redo was priced at 25 undrawn, 162.5 drawn, and 20 basis points upfront. Pricing on its core facility before the amendments was 11 basis points undrawn and 112.5 drawn.
- Banks will now overcommit for attractive credits and participate in syndications, with Chinese banks the exception, the banker said, adding, “We’re seeing declines from them on every capital request and we’ve been told it’s a capital issue, but I believe it’s also a political issue.”
Going forward. Longer tenors will gradually return on a case-by-case basis, the banker said, but when remains uncertain given the pandemic’s unknowns. “To come back entirely, I think we need to see earnings stability with borrowers, and that’s going to be sector by sector,” the banker said.
- On the pricing front, wallets still count. For the highest-quality companies with large global wallets and minimal Covid-19 impact, there will be plenty of capacity, the banker said, and little if any change in pricing from pre-Covid levels, except maybe a few more basis points upfront.
- “Banks will request borrowers to stay at maturities of three years and under, but five years will always get done” for high-quality borrowers, the banker added.
- In terms of loan size, best not to upsize and if necessary, supplement in the bond market. “Bank facilities are already underpriced, so upsizing them increases that pressure,” the banker said.
Next summer. Companies skipping the annual re-upping of their five-year facilities may want two-year extensions—a challenge today—come next summer. Banks will still face capital pressure, but given their desire to please clients in hopes of ancillary business, “I wouldn’t be surprised if we get back to the five-year market completely,” the banker said.
- The banker’s colleague suggested borrowers with that intent start signaling the relationship managers of their lead banks well in advance. “That gives everybody enough time to do their client plans, socialize it internally, and go to their capital committees,” he said.