Download Repricings May Increase in Volatile Market

April 2013
GUEST ARTICLE
Repricings May Increase in Volatile Market
Borrowers should evaluate credit agreements to take advantage of market windows
By J. Christian Nahr and Michael Schneider,
Fried Frank Harris Shriver & Jacobson LLP
I
n the recent past, the debt markets have proven to
be volatile. An increase in leveraged mergers and
acquisitions, such as the proposed acquisitions of
Dell Inc. (Nasdaq: DELL) and H.J. Heinz Co. (NYSE:
HNZ), and/or a general decrease in investor demand may
have already caused refinancing and repricing transactions
to become more difficult to execute or less attractive to
borrowers.
That being said, loan repricing transactions continue to get
done in the current market, and the market’s receptiveness
to these kinds of transactions could lead to an increase in
borrower-friendly repricings. Windows in the syndicated
loan market can open and close quickly. Therefore, it is
important that borrowers have the ability to act quickly.
Borrowers should review their existing credit agreements
to evaluate their cost of capital, loan maturities and other
operational flexibilities.
Since the fourth quarter of 2012, the loan market
has seen a sharp increase in repricing and refinancing
transactions. In January and February of 2013, loans
totaling approximately $47 billion and $46 billion,
respectively, were repriced, according to Standard & Poors
Capital IQ Leveraged Commentary and Data. But in the
recent past, loan repricings have become more difficult to
execute. In February, repricing transactions representing
loans of approximately $12 billion were pulled from
the market. Several other loan repricing transactions
were consumated, but with less favorable terms than the
originally requested terms.
The surge in activity was driven by strong investor demand,
which resulted in a significant decrease in borrowing costs.
In January and February, the average pricing reduction
for all repricing and refinancing transactions was 1.36
percent in terms of yield-to-maturity. Pricing reductions
were implemented by decreasing interest-rate margins
and decreasing (or eliminating) interest-rate floors.
J. Christian Nahr
Michael Schneider
Repricings of syndicated loans can be consummated
quickly, often in less than two weeks. They typically
require a brief lender presentation, a rating agency update
presentation (if applicable), a credit agreement amendment
and the delivery of other customary legal documentation.
Fees payable to the arrangers, agents, lenders and lawyers
are typically modest. Depending on when the original credit
agreement became effective, a prepayment penalty may be
required. Typically, prepayments in credit agreements are 1
percent of the prepaid loans for the first six or 12 months
after the agreement became effective. They are usually
structured as “soft call” penalties that are payable only if the
all-in-yield of the facility is reduced as the result of a repricing
transaction. In some instances, borrowers are able to negotiate
carve-outs, such as change of control transactions, dividend
recapitalizations and/or significant acquisitions. However,
these are not typically applicable in the context of a “pure”
repricing. In connection with a new repricing or refinancing
transaction, a “soft call” premium of the type described above
will likely be included in the credit agreement amendment.
As a result, a new prepayment penalty would apply if a
subsequent repricing was consummated.
Credit agreements often have provisions allowing
repricing amendments or loan modification
amendments. These provisions allow the pricing and
maturities of loans to be changed without any lender
vote, other than the lenders that are willing to provide
the new repriced loans or that are willing to exchange
their existing loans for new repriced loans. In addition,
these provisions allow existing lenders that are not
interested in participating in the new repriced facility
to be repaid.
If the underlying credit agreement does not contain
these provisions, “yank-a-bank” provisions can be helpful
in repricing and refinancing transactions. In these credit
agreements, reducing the pricing and extending maturities
can be implemented only with the consent of all of the
affected lenders. “Yank-a-bank” provisions allow the
borrower to remove and replace lenders that do not
consent to the credit agreement amendment so long as the
amendment has otherwise been approved by a majority of
the lenders. Thus, a few non-consenting lenders do not have
the ability to derail a repricing transaction. Refinancings by
way of a new credit agreement and related documentation
may be appropriate in certain instances, for example, if a
new arranger or administrative agent is being utilized or if
all of the deal terms are being renegotiated. A refinancing
will require more documentation and lead time, but can be
implemented without the consent of the existing lenders.
Though the primary focus in repricing and refinancing
transactions has been to reduce borrowing costs, many
borrowers have also been able to modify other terms in their
credit agreements. As a general matter, the market trend
has been to allow for greater flexibility. However, overly
aggressive changes can delay or even prevent a repricing or
refinancing transaction from closing. Achieving the right
mix of documentation-related flexibility and execution
certainty is a delicate balancing act. Borrowers should
consider the following credit-agreement modifications:
* Adding a “holiday” for the requirement to make the
annual excess cash flow prepayment;
* Reducing the percentage of excess cash flow that
must be used to prepay loans;
* Increasing the leverage-ratio levels that trigger stepdowns in the percentage of excess cash flow that must be
used to prepay loans;
* Increasing the flexibility in utilizing so-called
“incremental” or “accordion” facilities, including by
eliminating conditions that must be satisfied before such
facilities can be utilized;
* Eliminating financial-maintenance covenants for term
loans (so-called “cov-lite” loans) and, for existing “covlite” loans, adding or increasing a revolving-facility-usage
threshold that must be triggered before any financial
maintenance covenants are required to be tested;
* Increasing the financial maintenance covenant levels;
* Implementing high-yield style incurrence covenants,
which generally provide greater operational flexibility,
especially for the ability of the borrower to incur additional
debt or make certain restricted payments (including
dividends and investments); and
* Increasing operational flexibilities by increasing
additional baskets or exceptions or adding additional
baskets or exceptions, including those related to
future debt incurrences, dividends, debt prepayments,
acquisitions and other investments.
This is not an exhaustive list, and the precise changes
that a borrower should request will depend on the
strength of the loan market at the time the transaction
is launched and the operational situation and future
plans of the borrower.
Fried Frank partner J. Christian Nahr represents investment
banks, private equity firms, hedge funds and corporations
on financing transactions. Michael Schneider is a corporate
associate at the Firm.
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