Gentlemen’s agreements: time to reassess
Gentlemen’s agreements seem like a quaint idea when billions of dollars are up for grabs, yet, bafflingly, the capital markets continue relying on them. It’s time to stop assuming borrowers will blindly do what financiers want when there is a cheaper, easier or more sensible option for treasuries to take.
This week, UK utility SSE announced it had amended and extended a £1.3bn loan facility to add sustainability-linked margins and stretch the maturity from July 2022 to March 2024. SSE had previously exercised a pair of one year extension options on the undrawn facility to push the deadline out from 2020.
The unwritten rule in the EMEA loan market — at least as far as bankers’ wishful thinking goes — is that if a loan is near the end of its maturity, the done thing is for borrowers to undertake a full, fee-paying refinancing rather than an A&E. The latter are much cheaper, and consequently far more maligned by many bankers.
SSE did not do that. But why would it? The 2019 loan market, just like last year, is so far characterised by a severe shortage of deals. Borrowers are benefiting from banks falling over themselves to lend. Even in a banker’s wildest dreams, it would be a stretch to imagine a treasury official explaining to his or her CFO that the company could have got cheaper financing, but really wanted to do its banks a favour and pay more fees.
And despite many senior bankers across London privately complaining about how much they dislike A&Es, 26 banks agreed to SSE’s amend and extend. Just one dropped out of the facility, for a reason that has not been made public.
The wide-ranging support for SSE’s deal does not suggest there will be much, if any, reputational fallout among lenders from a company pushing its banks to break any supposed gentlemen’s agreements incorrectly assumed to be in place.
One could be forgiven for believing that these kinds of unwritten agreements are limited to the loan market, where relationships ostensibly take on a much higher importance than they do for the faceless investors filling a bond order book. But unwritten rules permeate the capital markets.
Most significantly, Santander went against a gentlemen’s agreement earlier this year when it became the first bank not to call an Additional Tier 1 capital bond.
What SSE did was simply undertake a course of action that was cheapest, quickest and met very little resistance from its banks. It is absurd that anyone would think a sensible borrower would have done anything else.