Refinancings have rocketed in 2011, buoying up volumes across the entire EMEA loan market. Corporate credits have flocked to the market to replace upcoming maturities, and with their RCFs now locked away they are perhaps hoping that the problem is over for another few years.
But many of these deals have five year maturities with two one year extension options. Lenders decide whether or not to approve those extensions after years one and two, meaning that far from being able to rest easy for at least five years, borrowers could be facing headaches in less than 12 months' time.
A five year plus one plus one facility arranged in 2011 will only expire in 2018 if both extension options are granted. These deals could then stretch well into the time when the Basel III rules are due to have kicked in. With this regulation looming over the market and with pricing in the loan market seeming to be on an upward trajectory, it is no wonder that some lenders are warily eyeing any extension option discussions that will come up next year.
Banks know that they cannot refuse to allow extensions lightly. Such a move would rule them out of any ancillary business for the remainder of the facilitys term, leaving dead deals on a banks books for another few years. Some, of course, could refuse the extensions anyway, especially if constrained lenders continue to cut back on the number of borrowers on their balance sheets.
But even those banks that want to continue the relationship may find a way to make granting extensions more palatable. The occasion naturally presents an opportunity for a bank to re-approach the issue of ancillary business with their lenders, reviewing what has been received so far and making a point about what more they expect.
And if extensions are granted, banks can add on extension fees to increase the all-in pricing. Other terms such as commitment fees could also be renegotiated. The size of these fees will reflect how far lenders are down a certain creek at that point, but with many market participants cautious about banks funding conditions in 2012, borrowers could yet be facing some tough negotiations.
Even with some attractively priced deals tucked away, corporate treasurers cannot sit back and hope to ride out whatever challenges come over the next 12 months.