LMA Webcasts Introduction to syndicated lending 11 June Toby Mann, Clifford Chance

Transcription

1 LMA Webcasts Introduction to syndicated lending 11 June 2015 Toby Mann, Clifford Chance

2 The Role of the Parties

3 Introduction A syndicated loan is where more than one bank collectively lend to the same borrower on common terms and conditions reflected in, and underpinned by, one loan agreement which is signed by all parties (i.e. the lenders, an agent who acts on behalf of the lenders and the borrower). 3

4 Types of Syndicated Loan Transaction Facility Type Considerations In the refinancing dominated loan markets the most common form of syndicated loan. Self-Arranged Club Relationship bank focussed defining the Borrower s top tier relationship banks. Typically arranged by the Borrower and focused on a group of existing and potential relationship banks no market element. Can be self-arranged by the Borrower or with an appointed Co-ordinator to manage negotiation and documentation. Commonly a pure club transaction will see identical participations from each Lender. An open market transaction arranged and managed by Bookrunners appointed by the Borrower. Syndication to banks agreed by the Borrower and Bookrunners allows for new Lenders to join an enlarged bank group. Best Efforts Syndication No guarantee of target quantum being met, market risk is taken by the Borrower with Bookrunners committing only to their final hold. Allows Borrower to accurately assess market appetite, but exposes both Bookrunners and Borrower to reputational risk. More flexible solution in terms of facility size as allows for upsizing when oversubscribed. Now most commonly seen in the commodity trader sector where maximum liquidity is sought. An Underwritten transaction provides the required loan amount up front through the commitment of a single Lender or group of Lenders the Underwriters who are mandated to bookrun a market syndication. Underwritten Syndication The Underwriters provide certainty of funding on Day 1: particularly important for acquisition and event driven financing. Market and reputational risk assumed by Underwriters, with a pricing premium attributable to the risk taken. Market flex provisions are included and help to mitigate the underwrite risk. The credit and documentation processes are easier to manage, and it is possible to maintain a higher degree of discretion. Banks rewarded with roles and fees relative to their committed amounts in syndication, without limitation to core relationship banks. 4

5 Overview of Roles Self Arranged Club Best Efforts Syndication Underwritten Syndication Mandated Lead Arranger Bookrunner Co-ordinator Documentation Bank Underwriter Lenders Facility Agent Mandated Lead Arranger traditionally the appointed arrangers but more often now an honorific title. Bookrunner banks appointed to approach the market and bring other lenders in to the facility. Co-ordinator typically appointed to act as a liaison between banks and borrower in a self-arranged transaction. Underwriter arranging bank group that commits to the entire facility amount and takes market risk of distribution. Documentation bank bank(s) responsible for managing the documentation process. Facility Agent appointed bank responsible for the administration of the facility post signing. Lenders banks that commit to pro rata sharing of the agreed facility. 5

6 Roles during syndication Bookrunners Invitation list Information Memorandum Invitations and Confidentiality Undertaking (LMA standard) Bank meeting and Borrower presentation Monitor syndication progress/status reports Agree final allocations Much of above now Internet based ( paperless ) 6

7 Roles during syndication Documentation Bank (often also Facility Agent) Appoints lawyers for Lenders Principal negotiator of Facility Agreement with Borrower Liaises with Mandated Lead Arrangers Responds to any questions of Lenders Organises signing: ceremony or power-of-attorney 7

8 Lawyers role Lawyers for the Banks Drafts and negotiates Facility Agreement Assists with comments from Lenders Checks conditions precedent Delivers legal opinion Lawyers for the Borrower Negotiates Facility Agreement Assists with preparation of conditions precedent Note: Lawyers will also be required in jurisdiction of incorporation of each Borrower/Guarantor 8

9 Roles post-signing: Facility Agent Lenders Facility Agent: manages information and cash flows Borrower Acts as agent for Lenders (and other Finance Parties) but paid by Borrower Facility Agent plays a key role in the administration of the Facility Will review conditions precedent and confirm when satisfied Conduit for all payments under the Facility Conduit for all notices given under the Facility Will calculate interest rates Will receive and pass on all borrower information (annual and semi-annual reports, compliance certificates etc.) Mechanics for loan transfers Replacement of Facility Agent 9

10 Revolving Credit Facilities & Term Loans

11 Structural Differences Drawing Revolving Credit Facility Option to draw any amount of the available funds at any point over the life of the facility Term Loan Must draw available funds within a limited availability period Undrawn commitments cancelled at end of availability period Repayment Each drawing is repaid at the end of its interest period Interest period is selected by borrower at time of drawing from options (e.g. 3, 6 months) At end of interest period, drawing can be rolled over, re-drawn or repaid In full at maturity (bullet term loan) Agreed repayment schedule (amortising term loan) Selection of interest periods throughout term Note for Bridge loans generally repaid via a preagreed source i.e. DCM/ECM issuance, disposals etc Prepayment Voluntary prepayments can usually be re-drawn Prepayments cannot be re-drawn 11

12 Pricing Differences Revolving Credit Facility Term Loan Bridge Facility Margin Payable on drawings only May vary by reference to a ratings or leverage grid Payable on drawn term loan Grid may apply too May be higher than margin on an RCF Payable on drawn term loan Low opening margin given generally limited to take-out mandate, stepping up to incentivise take out over time Commitment Fees Payable on undrawn amount of facility Often set as a percentage of the Margin (e.g. 40% of the Margin) Often no commitment fees - particularly if short availability period Ticking fees for acquisition finance Often no commitment fees - particularly if short availability period Ticking fees for acquisition finance Utilisation Fees Have become more usual for investment grade liquidity facilities Payable on drawn amount Can be in 2 or 3 stages (e.g. 25bps> 33% drawn, 50bps> 67% drawn) No utilisation fees No utilisation fees Extension Fees Payable on exercise of extension or term out options Generally N/A Extension and duration fees may be payable 12

13 Key Advantages & Applications Revolving Credit Facility Provides maximum flexibility for borrower Cheapest option for committed undrawn financing (commitment fees only) Suitable for efficient cash flow management Ideal as back stop financing for other markets (e.g. CP programmes) or for maintaining liquidity reserves as required by credit rating agencies Not suitable for heavily drawn facilities as utilisation fees may apply and the capital markets may be a more attractive source of financing for term funding Can include options to extend or term out maturity No amortisation- full facility amount remains available until the final maturity date Term Loan Drawn debt - limited flexibility Most suitable for core debt requirements Well suited to acquisition or other event driven financing Not suitable for back stop facilities or headroom requirements Can provide a higher return for some banks as a drawn asset but equally results in lower returns for some banks If prepaid or repaid cannot be redrawn More easily traded in secondary market Frequently structured to include an amortisation schedule Note can have both as separate tranches (e.g. cross-over credits, Lev fin) 13

14 Multicurrency Term Loans and RCFs can be single currency or multicurrency Optional currencies are usually limited to: readily available currencies that are freely convertible into the base currency any other currency that is approved by all the Lenders Interest basis for certain currency drawings In order to switch between currencies: RCF: draw a new loan Term Loan: switch to a new currency at the end of an interest period Exchange rate risk is mitigated by adjusting back to base currency - usually subject to a 5% fluctuation threshold 14

15 Mandate documents

16 Mandate letter: best efforts/club financing Appoints Mandated Lead Arrangers on exclusive basis Mandated Lead Arrangers agree to use best efforts to arrange the facility No commitment to underwrite Sets out the conditions to the offer to arrange the facilities May set out the intended hold amounts Fees generally set out in fee letter Conditional upon no business/market material adverse change 16

17 Mandate letter: best efforts/club financing (cont d) Borrower agrees not to announce or raise other financings - clear market subject to exceptions Borrower agrees to assist with the syndication process Borrower gives representation and warranty on information provided to Mandated Lead Arrangers May contain a no front-running agreement between the Mandated Lead Arrangers Contains an indemnity from the Borrower to Mandated Lead Arrangers Other boilerplate clauses including confidentiality /termination 17

18 Mandate letter: underwritten financing Appoints underwriters on exclusive basis Mandated Lead Arrangers agree to underwrite the facility Sets out conditions to underwrite the facility Sets out underwriting proportions Will contain a market flex clause ability to change pricing/terms/ structure for successful syndication Other provisions the same as the best efforts mandate letter 18

19 Speaker contact details Toby Mann Senior PSL, Clifford Chance +44 (0) SP: