Borrowers that were once thought impervious to funding risk are now being asked to pay a premium for term-out options on deals in the aftermath of a number of high-profile fallen angels that blindsided the banks with credit issues. Gannett and AT&T are paying 20 basis points and 25 basis points, respectively, for the inclusion of one-year term out options in their new credit facilities. International Paper is paying 25 basis points at the current rating and 50 basis points if downgraded to BBB-. "Lots of deals had term-out features in the past, but arrangers are thinking more closely about adding a premium, in light of Enron, Qwest and others," said a banker.
Rosemarie Loffredo, assistant treasurer at International Paper, said a term-out fee has been added to the new $1.5 billion CP backstop, completed last week. The premium has been added because of the stress of the market, she noted. "The banks have previously been looking to give it away for free," she said. "This deal came to market as Qwest and Enron were causing anxiety, and we proposed to the banks we include this. Our view is we take our relationships seriously and we're comfortable enough we won't use it." If International Paper borrows on the revolver and elects to term-out the loan, it is no longer a revolver and the borrowings are available for one year, Loffredo explained. Bank of America and Citibank lead the credit, she noted. The banks should have been looking at this long ago though, she noted.
B of A is leading the $1.25 billion AT&T refinancing while the Charlotte-based bank and J.P. Morgan lead the $2.75 billion Gannett CP backstop. One investment-grade banker, said "lenders have been screwed up to now," with another banker adding, "I don't know if this is permanent, but it is certainly driven by the economic environment. With the Enron, Kmart positions, the banks are taking the heat for 1997/98 positions."
The most highly rated-issuers still are able to get term-out options with no fee, but those that did not expect in the past this kind of demand, are now being asked to pay up, explained the banker. "There is recognition from the banks that, if a company elects to use a term out, something was used that was not planned," the banker said. "There have been some significant high-profile fallen angels where things have gone wrong and people look to the bankers and ask, how could you let them have that structure?" Officials at Gannett declined all comment on the refinancing. AT&T spokesman Dan Lawler also declined comment.