This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com
--------------------------------------------------------------------------------------------------------
Though investment-grade companies have found signs of life in the capital markets, even the most creditworthy companies have been refinancing under stricter covenants and higher rates, industry bankers told dealReporter.
While banks’ credit committees are willing to extend facilities to existing clients with AAA and AA corporate credit ratings, they are refusing credit to ”new names,” said an industry lawyer. The scarcity of capital has made banks willing to lend to the top of the credit chain while shutting out companies with lower credit statures, a first industry banker said.
For those investment grade companies unable to access capital, they are now seeking ways to roll over their facilities. ”It’s, ’I got this refinancing done and extended,’ as opposed to a cost-savings message,” said a second industry banker. In return, companies are also approaching lenders farther out from their credit facilities’ expiration in an attempt to ensure they will in fact be able to extend, no matter the cost, the second banker said.
Eric Reimer, a refinancing lawyer at Goodwin Procter said if a company has a term loan due, it is almost a three to four month process to get the focus of the credit committee. “You’re not seeing the frenzy you had before where you’d have six weeks and would have five different term sheets,” Reimer said, adding: “Syndication is very difficult now, and the deals getting done are on a smaller club basis—like two or three clubs that are already in do a refinancing.”
As companies are confronted with escalating interest rates, they will likely reassess their capital needs and renegotiate revolvers of smaller sizes, the first banker said. He explained that previously, a company could keep a sizeable credit revolver on its balance sheet as ”a nice insurance policy” or as an opportunistic M&A stash. That practice will likely fade as companies seek cheaper capital and M&A activity tapers.
A middle-market banker said that during the peak of the market 18 months ago, companies seemed not to worry about the lenders because they assumed the capital would be there. Now, he commented that before even approaching buyers, his firm goes out and conducts “warm ups” with lenders that would likely have interest without putting a deal on the table. He said lenders are just not willing to hang out with commitment papers for a long period of time. In addition, if companies approach the lenders, they will not offer terms right away.
In the case of bridge loans, lenders are structuring agreements in such a way to “incentivize the borrower to achieve permanent financing as quickly as possible,” a third banker said. As an example, a third banker said the rate on a loan with an initial price of LIBOR +500bps could soar to LIBOR +700bps after two months and could reach as high as LIBOR +1500bps, placing “tremendous” pressure on the borrower to refinance a short-term agreement.
In the current credit environment, “if you need to do a deal, you go back to the banks,” the first banker said, while the middle-market banker noted that deals in the USD 500m range are getting done most easily, usually with about 60% equity. The middle-market banker said banks continue ”clubbing together” to lend on deals, but they have sought to spread out the debt and shorten the time it remains outstanding.
In place of the “loose financial covenants of 2007,” Reimer said debt-to-EBITDA, interest rate coverage and capital expenditure covenants are all particularly tighter. “To the extent that there’s sub-debt, there’s cash-interest coverage,” he pointed out, adding that banks are pushing for more than three, four and sometimes five covenants in addition to amortization schedules. Moreover, the middle-market banker said the plentiful covenant-light agreements of 2007 would be traded in for covenant-tight agreements, adding that the most commonplace of maintenance covenants would be the debt-to-EBITDA ratio.
M&A deals in the middle market have been structured in recent months with senior secured debt issued at LIBOR spreads of around 600bps, and mezzanine financing at LIBOR +1400bps, the same banker said. Some of the smaller deals have seen greater lending interest from non-traditional banks, such as NewStar Financial (NASDAQ: NEWS)and Siemens (NYSE: SI), he noted, though they have not demonstrated a capacity to issue complex instruments like CLOs, which will be left to larger banks.
Senior credits in the middle markets are structured with a 3% fee upfront for a “best-effort transaction”. This means banks will try and raise the finances if they can find it, but not guarantee underwriting the package, the middle market banker said. Previously, companies would have a fixed cushion of around 30% or 35% before tripping an EBITDA ratio covenant. Some of these deals now have a 15% to 20% cushion, the same banker said. Reimer said such high LIBOR floors did not exist three or four years ago. Both Reimer and the middle-market banker agreed that they fall in the range of 3% or 3.25%, while substantial fees are added on top of that.
Still, in a 2 February report from Standard & Poor’s, it noted that the capital markets were noticeably more accessible to companies with A ratings. Wal-Mart (NYSE: WMT) tapped the bond markets in March 2007 at 5.081% and a spread of 55bps to Treasury bills. The discount retailer’s January issuance had a 3% yield, but came with a price tag of 174bps over the Treasury— more than triple its previous rates.
Moreover, the last three months have seen a flurry of large-cap, investment-grade companies tap the bond markets successfully, including AT&T (NYSE: ATT), Walgreen’s (NYSE: WAG), and AmGen (NASDAQ: AMGN). General Electric (NYSE: GE), the AAA-rated conglomerate, issued USD 29bn of notes in January, and has said that it will issue up to USD 16bn more by the end of 2009.
--------------------------------------------------------------------------------------------------------
For more information or to inquire about a trial please email sales@dealreporter.com or call Europe/EEMEA: +44 (0)20 7059 6160 Americas: +1 212 686-3076 Asia-Pacific: +852 2158 9714
