Revolving Credit Facilities
Negotiating these facilities can be particularly important for both creditors and borrowers. For the creditors – due to unsecured nature; and for the borrowers – because RCFs can set the tone for other group financings
A revolving credit facility is a very flexible financing tool: it is unsecured, loans can be repaid and reborrowed within the tenor of the whole facility.
The facility can be used for general working capital purposes.
Revolving credit facilities (RCFs) typically come with a short tenor, where the main tranche has a duration of one year. This can be supplemented with additional tranches with a longer maturity (three years or so).
Depending on an RCF, the borrower who draws on the facility might be the holding company of the group – and in such a case, the lenders will be structurally subordinated to any creditors lending at the level of subsidiaries. To a degree, this will be addressed through upstream guarantees and various restrictions on other loans that can be taken by the group.
RCFs are sometimes ‘split’ by geography – a group might have one RCF facility for EMEA and another for the Americas. Having two or more RCFs allows the borrower group to achieve a depth of syndication by adjusting the documents to follow local standards.
Because RCFs are extended on the strength of the balance sheet, they typically include well-developed covenants, representations and warranties. Naturally, these covenants, representations and warranties will be carefully negotiated by the banks and the borrower.
It is important to ensure that the restrictions included into the RCF do not interfere with other facilities of the group. To this end, RCF typically include various carve outs available for facilities and security falling with the definition of Permitted Indebtedness and Permitted Security. The parties can be expected to have a heated negotiation of the scope of the said definitions.
Similar considerations apply with reference to M&A activity of the group and to asset disposals. Here, the parties will be closely negotiating the definitions of Permitted Acquisition and Permitted Disposal.
Given the unsecured nature of RCFs, they will also include detailed financial ratio covenants.
The terms agreed in a group RCF can be used as a benchmark for other facilities of the group.
From the borrower’s perspective, the terms given to any other lenders should not be more onerous than the ones included into the RCF (since the RCF is an unsecured facility that can be used practically for any purpose).
The terms agreed in an RCF typically cover the whole borrower’s group, or, at least, the main companies of the group. It can be assumed that the group would like to have some flexibility to develop new businesses, including through SPV structures. Here, the parties will closely negotiate the definition of the ‘Group’.
The Loan Market Association has released templates of various facilities that are almost always relied upon when working on an RCF. A related point to note here the need to regularly renew / refinance RCFs. The main RCF tranche can be of just a year’s tenor, so the group will need renegotiate / syndicate on an annual basis. From renewal to renewal, the syndicate will expect that the documents remain broadly on the same terms and it may be difficult for the borrower group to introduce significant changes from the terms agreed previously.
RCFs are indeed very flexible instruments, it is prudent to remember that RCFs are the source of working capital and short-term cash. Where the borrower group intends to finance the development.
