Given the challenging financial backdrop and the continued uncertainty due to macroeconomic factors, and coupled with the recent volatility due to the pandemic, many corporates are wondering what impact these factors have on bank lending.
The Future Leaders in Treasury group organised an event to discuss bank lending in light of the current macro environment. The panel included a banker, corporate and legal counsel who also discussed the initial transaction set up, the term-sheet and how to close.
Initial transaction
Bank perspective
When advising a corporate or individual who is raising debt for the first time, the corporate needs to consider:
• Market trends
• Secured vs unsecured
• How to structure (RCF vs Term loan)
• Tenor + Size
• Currency
• Syndicate vs. bilateral vs. club deal
• How many banks to engage
Loan market products can be tailored so the corporate can get exactly what they want – it really is a negotiation and both sides want to get a deal that works for all parties. The key is to select your bank carefully – and in particular to ensure that the coordinating bank is fit for purpose. Once you appoint these coordinators you will have your main negotiations with them and they will then talk to the other banks involved, so picking the right bank is crucial.
Open and honest communication is essential – it cannot be over emphasised. It’s also important to focus on the right areas – don’t unnecessarily change things that are market standard (such as the documentation given by the LMA) but spend time concentrating on key commercial points instead.
Corporate perspective
From a corporate’s perspective it’s important to ready yourself for debt raising. Think about:
• Overall funding requirements
• Debt/ equity structure
• Securities that may be required
• Forecasts/ Modelling – to assess borrowing needs and potential repayments
• Banks to invite/ and potential ancillary services they may be offered
• Local/ regional/ global bank mix
It’s important to recognise that you have experts who are there to help you get this over the line. Trust your legal team and your bankers – and ask them questions. They will have a lot of experience and will know what is achievable. This will put you in the best position to be able to explain the loan and the terms and conditions to your stakeholders e.g. your CEO.
Legal perspective
When looking at the pre-term sheet, it’s important to know what you are signing up to and whether you can work within this on a day-to-day basis. You need to think about:
• Overview of existing debt arrangements
• Coordinator bank requirements
• Covenant expectations
• Timing considerations
Another key aspect is to ensure relevant stakeholders within the business are involved. If this isn’t done it can significantly delay the process (and be costly)!
Term Sheet/Negotiation
Bank perspective
The key thing to remember is that borrowers and lenders have a common interest. But what makes a good borrower in the eyes of a bank? Most banks will have criteria in place to determine the suitability of the borrower. They will look at:
• How the new loan will affect their existing portfolio (ie not all AAA or junk)
• Financial performance and projections
• Sector
• Geography
Banks start with the business case and look at what overlap there is between their capabilities and what the borrower needs. With more challenging risks, the relationship between the bank and corporate becomes increasingly important, as the bank needs to understand the story.
Legal perspective
For new loans and new lenders the long-form term sheet is the best option.
When it comes to negotiations, remember everyone wants the business to succeed, so they need to understand what the key issues are and what the growth trajectory is. Rely on your legal advisors - they will have seen lots of transactions so can advise you when you need some extra headroom.
Finally, it’s good to have individual conversations with the key contacts – don’t just leave the legal counsel to speak to the legal counsel. As the corporate you need to make sure you are also speaking directly with the relevant parties.
Corporate perspective
Once you’ve received the terms, you need to focus on:
• Price negotiation
• Scenario testing – to see how the business could handle potential covenants
• Covenants review
How do you go about closing the deal
Bank perspective
Once the broad terms are agreed you now need to fill the rest of the syndicated book. You need to look at:
• Information memorandum
• Types of banks being approached
• Over subscription targets
Corporate perspective
During the road show, it starts to get quite busy, especially when dealing with requests and credit discussions. You should look at:
• How do you organise the information flow and conversations
• Price negotiation
• Credit discussions
• Scenario testing – to see how the business could handle potential covenants
• Covenants review – try to utilise what you already have rather than add new ones
• Ancillary business available and which banks are interested in what
Legal perspective
It’s important to have a good coordinating bank, as we have previously mentioned, because there can be delays at the end if the coordinating bank hasn’t been talking to the other banks. Key things to look at include:
• Conditions Precedent process management – these are the conditions set by the bank that need to be satisfied before funds can be released
• Having a good internal lawyer to coordinate the internal legal and governance requirements
• Club vs syndicate considerations
Macro-economic factors
The panelists felt that cash flows had previously been highly volatile as a result of COVID-19 and these were just beginning to stablise. However, given the current volatility, bond issuance could no longer be assumed to be successful with the high yield bond market considered currently shut. Bank lending has therefore become the main source of funding for a number of organisations.
When corporates go to the public market this tends to be a much quicker process but it has the disadvantage of being reactive to external events. The bank lending market, however, never shuts although the size of the loan and the pricing does change. In the current environment the market is splitting in to the ‘haves’ and ‘have-nots’ with no change in behaviour for the ‘haves’ but a change in price and tenure for the ‘have-nots’. Those who work in the energy sector have been particularly affected by higher pricing and shorter tenures.
From a legal perspective, many corporates were already looking at covenant resets and waivers as a result of COVID-19.
What are your top two/three take aways to make the process as smooth as possible
Corporate perspective
1. Really understand what you are trying to achieve – what are you financing?
2. Make sure your CEO is on board.
3. Be careful and transparent about what you can offer the banks.
Banking perspective
1. Think about what you need and why.
2. Appoint a good coordinator and legal counsel – and listen to them.
3. Think about what you can give the banks and be quite firm.
Legal perspective
1. Don’t underestimate the behind the scenes administrative work.
2. Plan early to ensure you get ahead of things.
The ACT would like to thank the speakers Alan Chitty, Director of Group Treasury, Tax and Risk, Pepco Group, Claire Cooke, Partner, Slaughter and May, Nikolaus Drexler, Director - Loan Capital Markets, ING and Courtney Huggins, Director of Group Treasury, Canary Wharf Group for chairing the event.
Our thanks go to Slaughter and May for hosting the event.
