Repricings May Increase in Volatile Market
Borrowers should evaluate credit agreements to take advantage of market windows
In the recent past, the debt markets have proven to be volatile. An increase in leveraged mergers and acquisitions, such as the proposed acquisitions of Dell Inc. (Nasdaq: DELL) and H.J. Heinz Co. (NYSE: HNZ), and/or a general decrease in investor demand may have already caused refinancing and repricing transactions to become more difficult to execute or less attractive to borrowers.
That being said, loan repricing transactions continue to get done in the current market, and the market's receptiveness to these kinds of transactions could lead to an increase in borrower-friendly repricings. Windows in the syndicated loan market can open and close quickly. Therefore, it is important that borrowers have the ability to act quickly. Borrowers should review their existing credit agreements to evaluate their cost of capital, loan maturities and other operational flexibilities.
Since the fourth quarter of 2012, the loan market has seen a sharp increase in repricing and refinancing transactions. In January and February of 2013, loans totaling approximately $47 billion and $46 billion, respectively, were repriced, according to Standard & Poors Capital IQ Leveraged Commentary and Data. But in the recent past, loan repricings have become more difficult to execute. In February, repricing transactions representing loans of approximately $12 billion were pulled from the market. Several other loan repricing transactions were consumated, but with less favorable terms than the originally requested terms.
The surge in activity was driven by strong investor demand, which resulted in a significant decrease in borrowing costs. In January and February, the average pricing reduction for all repricing and refinancing transactions was 1.36 percent in terms of yield-to-maturity. Pricing reductions were implemented by decreasing interest-rate margins and decreasing (or eliminating) interest-rate floors.
Repricings of syndicated loans can be consummated quickly, often in less than two weeks. They typically require a brief lender presentation, a rating agency update presentation (if applicable), a credit agreement amendment and the delivery of other customary legal documentation.
Fees payable to the arrangers, agents, lenders and lawyers are typically modest. Depending on when the original credit agreement became effective, a prepayment penalty may be required. Typically, prepayments in credit agreements are 1 percent of the prepaid loans for the first six or 12 months after the agreement became effective. They are usually structured as "soft call" penalties that are payable only if the all-in-yield of the facility is reduced as the result of a repricing transaction. In some instances, borrowers are able to negotiate carve-outs, such as change of control transactions, dividend recapitalizations and/or significant acquisitions. However, these are not typically applicable in the context of a "pure" repricing. In connection with a new repricing or refinancing transaction, a "soft call" premium of the type described above will likely be included in the credit agreement amendment. As a result, a new prepayment penalty would apply if a subsequent repricing was consummated.
Credit agreements often have provisions allowing repricing amendments or loan modification amendments. These provisions allow the pricing and maturities of loans to be changed without any lender vote, other than the lenders that are willing to provide the new repriced loans or that are willing to exchange their existing loans for new repriced loans. In addition, these provisions allow existing lenders that are not interested in participating in the new repriced facility to be repaid.
If the underlying credit agreement does not contain these provisions, "yank-a-bank" provisions can be helpful in repricing and refinancing transactions. In these credit agreements, reducing the pricing and extending maturities can be implemented only with the consent of all of the affected lenders. "Yank-a-bank" provisions allow the borrower to remove and replace lenders that do not consent to the credit agreement amendment so long as the amendment has otherwise been approved by a majority of the lenders. Thus, a few non-consenting lenders do not have the ability to derail a repricing transaction. Refinancings by way of a new credit agreement and related documentation may be appropriate in certain instances, for example, if a new arranger or administrative agent is being utilized or if all of the deal terms are being renegotiated. A refinancing will require more documentation and lead time, but can be implemented without the consent of the existing lenders.