Post by Simon Crompton on Jul 31, 2009 1:38:34 GMT 4
The product itself only emerged in the past few months. Now forward start facilities are evolving beyond their original use, helping distressed companies out of trouble
The product itself only emerged in the past few months. Now forward start facilities are evolving beyond their original use, helping distressed companies out of trouble.
A forward start facility is a new loan agreed between a member of an existing syndicate and the borrower that will begin once its facility matures. Essentially a refinancing agreed in advance. Borrowers get funding certainty in uncertain times and lenders get higher fees, with the margins changing immediately to those on the new facility.
The structure has gained popularity since the beginning of the year. Initially the facilities were viewed as too borrower friendly, allowing underpricing and discouraging deleveraging. But compromise was found with new arrangement fees, top-up commitment fees and new money fees for the banks – alongside the new margins.
“And we’ve seen companies looking to them in restructurings now,” says one law firm partner in London. “Typically when some of the lenders refuse to allow an extension of the maturity on a loan.”
If a borrower finds itself without the unanimous approval from creditors needed to extend maturity, it can seek a forward start facility instead with those creditors that are willing to support it.
Those creditors are likely to have already agreed to other majority lender waivers, and recognise that the company is going to need a new facility when this one matures. And by arranging a forward start facility among themselves they can avoid the intransient banks while switching to higher fees immediately.
“There’s always going to be a few banks that make up the last 10% or 20% and you can’t get approval from,” says the partner, describing his experience in recent deals. “Some banks sometimes refuse to agree to anything because they don’t know what the answer is. They can just be like a rabbit in the headlights.”
The company will have to find new money to take the place of those banks, but big lenders have shown willingness to upscale already in deals this year, given the new money fee involved. This is essentially a commitment fee and is thus sized at the level agreed under the forward start facility (typically 50% of margin).