As economic conditions have deteriorated, the senior debt market has changed dramatically. Cash flow loans have slowed, and syndicated loans are increasingly more difficult to structure. Lenders’ priorities have shifted from new loan origination to collecting existing loans, and return requirements have increased significantly as banks face higher cost of capital. In this volatile environment, some businesses are approaching lenders with amendment requests to adjust the terms to existing loan documents. The loan amendment process can be challenging, especially for companies that don’t already have a strong relationship with their lender.
Smart Business spoke with Pete Hilton of PNC’s Capital Markets about current trends in the banking environment, their impact on companies seeking revised terms in the senior debt market and what business leaders should consider if they want to approach their lender or lenders about adjusting credit documents.
How have senior lenders been impacted by recent upheavals in the market?
Senior lenders and the companies they serve are both feeling pressure from tough economic times and from the scarcity of financing alternatives available. Lenders are experiencing unprecedented default levels, which constrain their capacity to make new loans, and companies are struggling with weaker revenue streams related to the slowing economy, as well as margin pressure related to commodity and fixed-cost issues.
Lending volume in general has decreased, and there has been a subsequent decline in syndicated deals for a number of reasons. Lenders’ decision-making processes have shifted. There has also been an unprecedented number of mergers and acquisitions in our industry, which has resulted in a reduced pool of lenders in the syndicated market. And lastly, pricing structures have changed because they are heavily influenced by the size of credit facilities and the capital constraints of the commercial banks.
How does the relationship that business leaders have with their banks impact their ability to obtain capital?
When capital is scarce, credit becomes more expensive, and lenders take a more disciplined approach to allocating it. Lenders may look beyond quantitative factors such as credit quality and price and think about how often they’ve come into contact with management and whether or not management has been readily accessible and responsive when questions or concerns arose. A company’s relationship with its lender is also a factor when it comes to negotiating loan amendments and, in this type of environment, more companies are seeking them than ever before. An amendment to the terms of a loan document that were entered into when times were better can be an alternative to defaulting on an existing credit agreement.
Most amendments to a syndicated credit agreement can usually be made by an agreed-upon percentage of the lenders, but certain amendments will require the consent of all affected lenders. Advance notice to your lender and an honest assessment of your financial situation by your company’s management are critical if you want your amendment request to be seriously considered.
What should a company be aware of if it is considering an amendment request?
- Lenders may request higher pricing due to weaker credit metrics and to the overall higher cost of capital in today’s loan market. The amount of pricing adjustment will be influenced by the nature of the request — whether it is performance-related or opportunistic — as well as the composition of the lender group. Certain lenders have minimum pricing parameters or hurdles, given current conditions.
- Lenders may seek a reduction of the loan commitment, collateral and/or incremental collateral to secure loans.
- For syndicated financings, most covenant adjustments need ‘required lender’ approval, which typically represents a majority vote of the bank group participants to pass the amendment. This distinction can be critical given certain lenders’ desire to exit a particular industry or credit.
- Extensions of tenor will require a 100 percent vote of the lender group and therefore will most likely require higher pricing to complete.
- If the extension request is rejected by certain lenders, you’ll still get valuable information about lenders who no longer want to participate and can develop a strategy to replace them.
- Lenders are requiring additional time to process amendments. In the past, the process may have been five to 10 business days, but that has increased to 15 business days or more depending on the nature of the request.
In the current market, it can’t be stressed enough how important is to have regular communication with your lender or lenders to keep them updated on your company’s performance. They’ll be in a better position to help you, and you’ll get a better understanding of how your financial providers are operating through this difficult environment.
This article was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell securities or to engage in any specific transactions, and does not purport to be comprehensive. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other adviser regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors. The PNC Financial Services Group, Inc. (“PNC”) provides FDIC-insured banking products and services and lending and borrowing of funds through its subsidiaries, PNC Bank, National Association, PNC Bank, Delaware and National City Bank, which are Members FDIC. Services such as the syndication of loans, public finance advisory services and securities underwriting, sales and trading are provided by PNC Capital Markets LLC, and NatCity Investments Inc, registered broker-dealers and members of FINRA and SIPC. Investments and Insurance: Not FDIC Insured. No Bank or Federal Government Guarantee. May Lose Value.
