Banks are asking corporate clients to accept new ways of pricing loans in an effort to cut potential losses as market conditions deteriorate.
The request tackles a key concern for banks sitting on an estimated $6,000bn of undrawn loans agreed before the credit crunch hit last summer.
At that time, companies were able to secure loan facilities at historically thin margins over Libor. While banks are obliged to honour those low rates, their own costs of funding have risen.
Bankers have become increasingly concerned that companies will draw on these more favourably priced short-term loans rather than issue bonds, which are more expensive.
Porsche, the German carmaker, highlighted this trend when it drew down on a standing €10bn ($14.7bn, £8bn) credit line in February.
With many US companies having to refinance these short-term revolving credit facilities in recent months, banks such as Citigroup and JPMorgan have sought to link the pricing of the loans to moves in the market rather than charging a fixed spread above Libor. Companies such as AT&T have agreed to have some of their loans priced in this way.
With market-based pricing, the margin for these revolving credit facilities is linked to the cost of protecting against the borrower’s default, based on data provided Markit Partners, at the time that the company seeks to draw down on a facility. Evan Zebooker, director at Markit, said the company was working with other key industry players to establish this pricing method as a market standard.
The approach allows borrowers to raise more money over longer periods of time. Borrowers can also benefit from price differentials if market conditions improve.
With lenders being more selective about how they deploy capital, this market-based pricing system is encouraging banks and investors to lend as they are being better compensated for the use of their capital.
“This pricing system has had more use in the US where there has been a greater number of companies extending or renewing existing credit facilities as well as for short-term bridge facilities,” said Steven Victorin, head of global loans for Europe and North America at Citi. He added there was the potential to introduce market-based pricing in Europe, particularly as the rate of companies looking to renew their facilities accelerated next year.
“This system allows companies to renew credit facilities, which banks might have otherwise looked to reduce,” said Andy O’Brien, co-head of leverage finance at JPMorgan. “Several large European corporates considered putting in place these sort of facilities.”
JPMorgan has arranged this financing for about 12 US companies, representing 75 per cent of the new financings being done in the US market.
By Anousha Sakoui |
