LONDON Undrawn loans in Europe’s leveraged market are pricing higher than term loans for the first time as bankers dig in their heels and refuse to succumb to the downward pricing pressure seen in the term loan market.
Revolving credit facilities have historically priced 50bp lower than bullet term loans, but unlike term loan pricing -- which has plummeted on both new and existing deals – pricing on undrawn facilities has remained at the same level.
“This is the first time where RCFs have priced wider than term loans on a wide scale basis. Banks are digging in their heels and pricing is not coming down,” a senior leveraged banker said.
Pricing has tightened on term loans since the last quarter of 2016 as a result of investor demand far outstripping supply. Sponsors have taken advantage of the market dynamics to reprice and refinance term loans of existing portfolio companies, in some cases twice within a six month period.
However, the same supply and demand dynamic is not there for the provision of unprofitable undrawn facilities, which are largely done for relationship purposes. Undrawn facilities are seen as capital intensive and pay a small commitment fee of 35% of the margin.
“RCF pricing is all over the place at the moment, especially after loans reverse flexed significantly lower. No one wants to do RCFs as they are not very attractive -- you have to have capital allocated against a commitment fee. Banks do them for relationship reasons and when term loan margins move so fast, there is no way banks can or want to match the speed of the change,” a second senior leveraged banker said.
For example, Swiss medical diagnostics company Unilabs allocated a loan at the end of March, comprising a €175m revolver paying 375bp with a 0% floor and a €940m term loan priced at 300bp with a 0% floor.
ON THE WAY UP
While banks have maintained pricing for revolvers on a number of repricings, there has been an increase in pricing on revolvers that form part of new leveraged buyout loans.
Most banks will be forced to take a portion of the undrawn loan on new deals in order to get an allocation of higher yielding term loans. With term loan pricing so unattractive, extra yield is being piled on to revolvers, in a bid to sweeten a deal and tempt lenders into the deal.
In an unusual move, an OID is being added to some revolvers, in addition to higher interest margins, in a bid to crank up the returns.
European medical laboratory services operator Cerba Healthcare closed a buyout financing at the end of March that included a €175m RCF priced at 350bp with a 0% floor and a 99 OID, as well as a €794m TLB that priced at 300bp with a 0% floor at par.
Meanwhile, Belgian aluminum systems manufacturer Corialis closed in January a €125m RCF that paid 400bp over Euribor/Libor with a 0% floor at 99, and a €355m term loan paying 375bp with a 0% floor at par.
“On new deals you do the revolver as a loss leader. If a bank comes in just as a participant then they are getting some OID and some term loan, to juice up the returns,” a third senior banker said.
RAISING THE PRESSURE
Sponsors are beginning to question whether there is a way to put pressure on banks to reduce the pricing of undrawn facilities, which would be a further blow to bankers already suffering from a squeeze on transaction fees.
However, some bankers think the relationship aspect will prevent sponsors pushing banks too hard, especially as a 35bp commitment fee is not likely to materially impact the ultimate return on portfolio companies.
“Sponsors don’t want to necessarily screw up the relationship with banks arranging a deal as they know the revolvers are a costly piece of the transaction for everyone, especially investment banks. However, revolvers are not super costly for sponsors and the commitment fee on a revolver, which they pay on a running basis, is quite small and arguably peanuts to them,” a fourth senior banker said.
The second senior banker countered: “Some sponsors have been moaning about it but it is hard to see how you fix the situation as the resources for undrawn lines are limited. Ultimately revolvers will trend down if term loans stay where they are as sponsors will put pressure on banks to move. Will margins stay low enough for long enough? That is another matter.”
(Editing by Christopher Mangham)