Case Study
Briefing for Finance Staff
Tuesday 3rd February 2009
Glad Tidings of Great Joy For
Finance Directors and Finance Committees
Although the level of new bank funding to the sector has greatly decreased over the last few months, some lenders are still open for business through new facilities or increases to existing facilities.
The change in credit markets over the last few months has inevitably led to lenders being more cautious. This is filtering through to the stance taken on the terms of loan documentation. So what changes have been seen over the last few months?
Fees, Margins, Ratios
Arrangement fees are back with a vengeance, along with non utilisation fees and on many occasions these fees have increased from the point of outline terms to the sign off date.
Margins have risen significantly and the recent Circle Anglia bond issue is in danger of setting the bar - 270 basis points over gilt.
Financial ratio expectations become more conservative and will be being looked at very carefully in the light of dropping RTB sales and valuations.
Lenders are becoming more conservative in setting the financial ratios. We are also seeing the introduction of prepayment fees in circumstances where these previously would not have been charged.
Certain clauses in loan agreements are also coming under greater scrutiny as lenders are looking to ensure that documentation is loan market association (LMA) compliant. Certain lenders may be trying to bring documentation into LMA style in anticipation of a disposal of loan books and the rumours
Certain lenders are choosing to take the opportunity to look again at existing facilities if a RSL is seeking new funds, or indeed seeking to convert an existing development loan into a term loan. One might cynically take the view that having developed a relationship with a lender you would stand or fall together but, as we have seen when the banks are in trouble, a more self centred approach often takes precedence.
Loan Agreement Provisions
Some of the main provisions that lenders are focussing on are:
- - Market disruption
These provisions set out how the interest rate applicable to loans will be calculated, in certain circumstances, in place of the LIBOR based interest calculation.
There are only a relatively small number of syndicated deals in Scotland. However provisions can come into play when one or more lenders with a pre-agreed proportion of participations in the loan notify the agent that the cost of their match-funding in the London inter-bank market in respect of that loan would be higher than the LlBOR rate applying to that loan under the loan agreement. I have already seen an attempt by one lender to have such a clause in its standard loan documents.
If this market disruption provision is applied, the rate of interest which applies to the loan is determined on a lender-by lender basis using the rate notified by each individual lender to the agent as the cost to that lender of funding its participation from whatever source it selects.
We are aware that lenders in the corporate market have been considering invoking the market disruption clause as a means to achieve a return on loans which reflects their actual cost of funds.
If any lenders to the sector did invoke this clause for borrowers, any variation in the rate of interest payable would alter the RSL's cash flow burden and may have a negative impact on financial covenant performance.
- - Rights to transfer or sell down loans
Prior to the onset of the credit crunch, RSLs were able to negotiate provisions into loan agreements restricting the lenders' ability to sell down or transfer their loans, in whole or in part only, with the prior consent of the borrower. This position has changed, with lenders wanting greater flexibility to sell down or transfer their loans without borrower consent.
- - Restrictions of mergers, amalgamations and transfers of engagement
Lenders are imposing tighter controls on the ability of borrowers to enter into mergers, amalgamations and transfers of engagement without lender consent, as lenders seek to have greater control over changes to a borrower or its group structure. This is having an operational impact on the ability to complete mergers without re-pricing, both between RSLs in different groups and those which are already within a group structure.
- - International Swaps & Derivatives Association (ISDA) agreements
Lenders have been monitoring mark-to-market exposure under ISDA agreements. Where these exposures have exceeded any applicable threshold levels, there have been calls for cash or property to be put up as security. There are timing implications here as borrowers have been bringing forward security for existing loan commitments to ensure they can draw as and when. For those borrowers without security trust arrangements, providing property security in this instance becomes more complicated too.
Potential pitfalls
In the current climate, heads of terms issued by lenders are only valid for a few weeks before they lapse. In order to reduce the risk of a re-pricing during the course of negotiations, RSLs should ensure the requisite board and finance committee authority is obtained within this timescale and loan documentation negotiations are concluded.
If an RSL is going to charge property as security for its market to market exposures under ISDA agreements, any existing Section 66 consents should be checked.
If existing Section 66 consents only refer to liabilities under a particular loan agreement, a revised consent will be required in order to permit the use of that property as security for liabilities under an ISDA agreement. Before revised consent is obtained, RSLs may be required to put cash up as security for hedging exposures.
Where RSLs are proposing to undertake activities which may require the consent of their lenders (eg. a merger), the likelihood of obtaining the necessary consents should be discussed with lenders as soon as possible. Over the last few months lenders have been more reluctant to give consent and, where consent has been obtained, it may be conditional on payment of a consent fee or even a complete re-pricing.
If you would like any further information on the issues raised in this briefing contact
Stephen MacGregor, Partner
Direct Dial: 0141 225 2574 or Email: sxm@tcyoung.co.uk
Please note that this briefing is not a comprehensive statement of the law. Legal advice should be taken on individual circumstances