Finance departments regularly ask themselves which format is best suited to bank credit: a revolving credit facility (RCF) or a term loan? Syndicated credit or bilateral lines? Matthieu Guillot, Managing Director, Debt Advisory at Redbridge, answers some questions about these issues.
Can you give us a brief overview of an RCF?
– Matthieu Guillot, Redbridge: A revolving credit facility is an extremely useful liquidity instrument for companies. It can be used to finance the company’s general requirements and to meet one-off cash flow requirements by drawing on a confirmed line that is generally available for five years (often with two one-year extension options). It has to be paid back at maturity.
An RCF can include an accordion clause, which enables a company to increase the size of the credit line without having to obtain the unanimous agreement of the lenders. It can also be used as a ‘swingline’ by borrowers with commercial paper programmes (NEU CP, EuroCP, USCP). A swingline enables companies to draw money at day-value.
In terms of price, an RCF line includes a margin (generally based on the company’s leverage or credit rating), a utilisation fee and the currency index (e.g. Euribor for drawdowns in euros). On the undrawn portion of the loan, the borrower pays a non-utilisation fee. If the RCF is used as a back-up line, it is possible to negotiate tight margins with the bank, because the RCF used as a back-up line generates a very low liquidity cost for the banks.
RCFs can (and will increasingly have to) incorporate ESG (environmental, social and governance) criteria in the form of sustainability-linked loans with two or three performance indicators and trajectories for the company’s sustainable commitment fixed over the term of the loan.
What’s a term loan?
– A term loan is a medium- or long-term bank loan that enables a company to finance its investments or acquisitions. Term loans can have a maturity of up to seven years. It is generally an amortizing loan, although it is possible to negotiate a substantial bullet element.
It is possible and advisable to plan for a quite long period of availability during which the loan can draw, up to three years.
Term loans can also include accordion clauses. Term loan pricing consists of a margin (generally based on leverage or rating) and the currency index (e.g. Euribor for drawings in euros). The borrower pays a non-utilisation fee on the undrawn portion of the loan.
How do companies of different sizes use these instruments?
– Large groups generally use RCFs to ensure their liquidity: they guarantee their commercial paper programmes. They usually take out a term loan when financing an acquisition as part of a mix bridging loan (on capital market issues) / 3-5 year loan, with or without underwriting by banks.
Medium-sized companies often use RCFs as a back-up or to finance their working capital requirements, although they can also be used to finance growth. Term loans are more commonly used by small companies for (pre-)financing capex and acquisitions (hence the advantage of having extended periods of availability).
When it comes to bank debt, is it better to syndicate or use bilateral lines?
– The two formats can actually complement each other and be used together to meet a company’s financing needs. But to answer the question, let’s consider the advantages and disadvantages of syndicated and bilateral lines.
Syndicated credit provides a number of advantages for businesses. First, the legal documentation associated with a syndicated loan can be used as a reference for other kinds of financing, particularly in the context of acquisition financing. Second, syndicated loans can be used to cover a broad range of a company’s financing needs: working capital requirements, acquisition financing and capital expenditure projects (capex). The syndication market is deep, enabling a company to raise significant amounts of bank debt. Finally, syndicated loans are particularly well suited to acquisition financing as they bring together a pool of lending banks.
Bilateral lines also offer advantages. They are generally taken out at competitive prices as the relationship with the bank plays a key role. The legal documentation is generally more flexible and easier to negotiate than for a syndicated loan. That said, it’s important to ensure that the documentation for the various lines is aligned to maintain the same standard of documentation as in a syndicated loan.
Why should syndicated loans and bilateral lines of credit be mixed?
– Syndicated credit is more expensive, but larger amounts can be raised. Bilateral credit lines are less attractive to lenders and the management of credit events such as waivers and amendments is riskier. The administration of bilateral lines in terms of negotiation, refinancing, drawdowns and repayments is also more onerous.
As part of a corporate financing strategy, it can be useful to combine syndicated credit and bilateral lines to benefit from the advantages that these two forms of bank debt provide.
For example, syndicated credit could be used to finance the company’s holding company, with bilateral lines being used to finance subsidiaries. Finally, a syndicated loan can be used as a back-up line for the company’s cash flow requirements, while bilateral lines can be used to finance current needs.