Lucy Grimwood, Senior Associate in our Finance team writes an article on multi-lender facilities, published by Social Housing Magazine. A subscription is required to access the article on the Social Housing website. Read more here.
As multi-lender deals return to the sector, Lucy Grimwood looks into the risks and opportunities for housing associations.
Do loan agreements with multiple lenders offer opportunities or risks for borrowers and lenders?
While common for corporate borrowers, such transactions have been almost non-existent in the social housing sector since 2008.
As reported by Social Housing today, however, Sovereign Housing Association last week entered into an unsecured 250m revolving credit facility (RCF) with five lenders (Lloyds, MUFG, NatWest, National Australia Bank and SMBC), which Winckworth Sherwood advised Sovereign on. Hyde Group has also entered into a seven-year club deal with three banks.
Club deals and syndicated lending
Historically, multi-lender facilities arose when lenders made larger loans to single (typically investment-grade) borrowers. They sought to share the risk, lending with other banks under a single facility agreement. Club deals and syndicated lending are both multi-lender facilities, and the terms are often used interchangeably in the market –
although there are technical differences between them.
In a club deal, such as the Sovereign RCF, the ‘day one’ group of lenders are typically known in advance. There will also be an arranger (or arrangers) to help assemble the lending group, and an agent to liaise with the lenders going forward. Such transactions incorporate the general benefits of multi-lender facilities. Unlike syndicated transactions, however, the lenders (and their commitment to lend) are in theory certain at the outset – reducing the need for underwriting.
Truly syndicated lending differs somewhat: the arranger (or the bookrunner/co-ordinator) will focus on confirming the primary syndicate (which often exceeds 20 lenders) and negotiating the loan documents with the borrower on behalf of the syndicate. It was primarily to standardise syndicated documents that the Loan Market Association was
formed. As the ‘day one’ lenders may not be certain from the outset, arrangers may also agree to arrange the facility on an underwritten (ie guaranteed) or ‘best efforts’ basis.
It is worth noting that many facility agreements in the sector may look like syndicated or club deals, but are in fact single-lender facilities (with an option to syndicate in the future). Such transactions may have an agent and an arranger, and refer to multiple lenders, but in reality these roles are taken by a single bank.
Back-to-back deals
Multi-lender facilities were popular in the sector before 2008 (particularly for large-scale voluntary transfers), but have been rare since then – even for registered providers with large funding requirements. Some providers have been addressing this by putting multiple facility agreements in place, often in quick succession. This results in a separate facility agreement for each lender, but (hopefully) substantively similar terms, with corresponding
efficiencies.
While this approach certainly has merits, there are also benefits to club and syndicated loans.
The more the merrier?
Loan agreements with multiple lenders have a number of benefits for borrowers. Larger loans should be available, as lenders can spread the risk. There should also be operational efficiencies: the borrower has a single facility agreement with one set of covenants and liaises with one contact (the agent) – rather than multiple agreements, with different covenants and lenders to deal with.
“For lenders, entering agreements with other lenders may help with portfolio management, by limiting financial exposure to individual borrowers”.
For lenders, entering agreements with other lenders may help with portfolio management, by limiting financial exposure to individual borrowers. Sharing the risk may also help in less standard transactions. For example, although the sector’s interest in unsecured lending is growing, it is not yet widespread. So, for now at least, some lenders may offer unsecured lending jointly with other lenders.
Of course, multi-lender facilities are not perfect. Agents and arrangers play an important role, for which borrowers should expect to pay a fee. Furthermore, the pace of the transaction is set by the slowest lender. This could be problematic if time is short.
What about consents?
Is seeking consents harder in multi-lender facilities? It depends on the syndicate, the borrower and the consent required. It also depends on whether the alternative is any better. Imagine two borrowers have a 300m liquidity requirement. Borrower 1 puts in place six 50m facilities, with six different lenders and facility agreements. Borrower
2 enters into a single 300m facility, with six lenders. If each borrower subsequently needs consent, borrower 1 has to approach six lenders, whereas borrower 2 needs to approach only the agent (who should seek the lenders’ consent on borrower 2’s behalf).
Furthermore, borrower 2 may not need consent from all lenders: multi-lender documents typically require ‘majority lender’ consent in many cases (though not all – some consents, such as changing key commercial terms, usually require consent from all lenders). Depending on the number of lenders and their lending commitments, majority
lender consent may only require consent from (for example) four out of six lenders. So it might well be easier for borrower 2 to secure consent than borrower 1.
More generally, it is usually easier to seek consents from lenders than bondholders. Bond covenants do tend to be less restrictive – making it less likely that consent would be required – but if bondholder consent is needed it is usually more challenging to obtain.
Lenders are increasingly conscious of their exposure to individual borrowers, making large commitments unusual. As the sector’s development ambitions grow and funding needs mature, so too may the attraction of multi-lender facilities.