Undrawn revolving credit facilities in the European loan market have long occupied a distinct and separate space in the capital markets — a sort of twilight zone where the usual rules of pricing do not apply.
But French utility GDF Suez has recently brought this distinction into the spotlight. The company has drawn about one third of two of its facilities, staying below the level at which utilisation fees would kick in. It has deposited the capital with a non-relationship lending bank for an arbitrage play.
Not only have lending banks been angered by this rather generous interpretation of "general corporate purposes", but it has made them question the differential between margins on drawn and undrawn credit lines.
Any undrawn credit line can, of course, be drawn at any time, so surely it might make sense for the utilisation fees to kick in from the moment a revolver starts to be drawn, and for those fees to bring pricing up closer to the level of a drawn facility — rather than the gulf that currently tends to exist between the two?
But who could ever accuse bankers in the syndicated loan market of being sensible? Instead, market participants point to the woolly excuse of relationships to justify ever more ridiculous pricing on undrawn revolvers.
This is not to say that the relationship between bank and corporate should be low on the list of factors to be considered when lenders are mulling a deal. After all, which banks would happily turn up their noses at the opportunity to be first in line for the ancillary business from a multi-national conglomerate with an acquisitive strategy?
But the cross-sell perks cannot be the main driver behind such tight margins offered on undrawn lines.
Although borrowers in the European loans market are reducing the size of their syndicates — and so increasing the share of the ancillary pie on offer to each of their lenders — banks still have to question the real value of this cross-sell. This is especially true when a chunk of that projected ancillary business is tied up in long term contracts that may not be transferred over the lifetime of the loan. That GDF Suez has placed its cash on deposit in a bank that is not in its lending group is especially telling for banks that have emphasised the priority of relationships.
With banks’ shareholders demanding the greatest possible return on equity, the worth of the relationship to the loans business is going to have to be quantified and picked over, and this can only push up the price of undrawn facilities. By 2018, of course, Basel III will have well and truly flattened the playing field. The liquidity coverage ratio will require all lenders to hold capital against any revolvers anyway — whether drawn or undrawn.
There will have to be a significant shift in the pricing dynamic for European loans over the next seven years. That shift might well see revolver margins dragged back up to reality before too long.