Leveraged finance deals including super senior revolving credit facilities will face an increase in pricing due to changing regulatory conditions post-Covid-19, market participants told Reorg. Bank lenders had already been pulling back from providing super senior revolver facilities for some time, making way for alternative structures provided by debt funds.
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“Because of post-Covid changes to the insolvency regime in countries such as Germany and the U.K. the structural priority of the super senior RCF could be called into question,” Osvaldo Pereira, partner at Park Square Capital said.
Germany’s new pre-insolvency restructuring procedure under the Stabilization and Restructuring Framework for Enterprises, or StaRUG, provides the possibility of restructuring liabilities of a company outside official insolvency proceedings and overriding individual creditors.
Although the regulation is fairly new, there have been some cases where debtors chose to restructure their debt through the StaRUG procedure. In September, for instance, holders of German retailer
Eterna Mode’s 2024 bond agreed a restructuring, under which they stood to recover 12.5% of the nominal value including accrued interest, after the company’s failed attempt to convince creditors to defer interest repayments for its 2024 bond.
Unitranches Deals Including SSRCFs
In unitranche deals involving debt funds or term loan transactions with bank clubs, super senior RCFs are provided, usually by a commercial bank to provide the borrower with additional liquidity. The facility would be repaid in priority to the other debt in case of the borrower’s default. Usually, the lender of the facility would also be granted security by the borrower.
Despite the priority for SSRCF lenders it is not always attractive for a bank to provide such facilities given that the lender would need to commit the capital to the company, which would only draw on the line periodically, and then usually pay it down again. Revolvers are typically used to fund working capital, or to cover bills and unexpected expenses during times of revenue fluctuations.
“There are only a small number of banks that would hold super senior RCFs in size,” Pereira said.
Usually banks provide SSRCFs in connection with other services. For example, DZ Bank provided a super senior revolver to German media holding
DvH Medien to finance its growth strategy, in addition to providing payment and transaction services. Commerzbank is a super senior lender to German heat meter manufacturer
Engelmann Sensor, but also provides ancillary services to the company as its “house bank.”
Competitive Pricing
Theoretically, SSRCFs are more expensive compared to term loan structures due to the inherent features of the facility, market participants said.
In a highly competitive environment banks usually try to provide a better pricing model to attract good quality borrowers. One way for banks to do that is to subsidize super senior RCFs with additional business - the lender would underprice the revolving credit on the basis that it would also provide ancillary services to the borrower to generate a return.
Interest rates for RCFs are set as a margin over a floating reference rate such as the sterling overnight index average, or SONIA. Additionally, banks charge a commitment fee for undrawn revolving credit, which would be a certain percentage of the committed loan.
But in the last 12 months banks have become less willing to provide SSRCFs as the risk-adjusted return for the lines often does not add to the expected facility usage and ancillary income, according to the
European Mid-Market Debt Update H1 2021 by law firm Duff & Phelps. Instead banks are increasingly reserving their SSRCF lending appetite for existing clients and priority private equity sponsors. Another factor hampering European banks’ willingness to provide SSRCFs is the European Central Bank imposing total gross leverage caps, the report stated.
Direct Lenders Providing SSRCFs
As a result direct lenders have started to structure alternative facilities for unitranche deals.
“We will see more debt funds providing either SSRCF 6-12 month bridges or a clunky SSRCF themselves in case banks are not willing to provide this. In the latter case this will be done with a higher price in terms of upper fees and margins,” Floris Hovingh, managing director European Debt Advisory at Alvarez & Marsal, said.
This development is not new. Established debt funds have provided the RCF in unitranche deals to accelerate the completion process in the past.
“Private debt funds would in individual cases underwrite a commitment for an RCF and try to find a bank to provide the facility,” Markus Geiger, head of private debt at ODDO BHF said.
But, according to market participants, there will be more RCFs provided by debt funds on a long-term basis.
“As a standalone product, providing SSRCFs in volume remains difficult for unitranche lenders as it requires a bank at the back-end to provide a large RCF funding line with unattractive economics. However, those direct lenders that have the ability will use their own direct lending fund’s RCF to support their lending deals as it is an increasing challenge in getting commercial banks to support their deals, given the high headline leverage and non-core nature of the product,” Hovingh said.
--Kerstin Kubanek
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