Insider's View: The Evolving Senior-Lending Market
More opportunity opening up on local levels
WASHINGTON -- The senior-lending market has definitely improved since the dark days of 2008 and 2009. Although lending standards have tightened, the fear of “lending at all” has faded. Many senior lenders have become more aggressive with creditworthy borrowers and have embraced creative structures that allow companies to increase leverage ratios.
A senior-secured-credit facility, which includes long-term, short-term, bridge loans, lines of credit and standby lines of credit, is normally constrained by limitations on the amount of senior debt to EBITDA a lender is willing to fund for any given transaction. A senior debt-to-EBITDA multiple is one of the many calculations used by banks and banking regulators to assess risk ratings and allocate pricing.
In the current marketplace, senior debt-to-EBITDA multiples have expanded to the mid-4s or high 5s when including leased leverage. Typically, any loan above a 4 multiple requires a quicker pay-down, may consist of an interest-only portion and/or is only extended to most creditworthy borrowers.
Loan pay-downs are typically achieved by property sales, selling the business portion of a location (“key money”) and/or other post-closing operational strategies that result in the reduction of a larger portion of debt in relation to the loss of ongoing EBITDA.
Amortization periods have expanded to up to 20 years, and loan terms have grown to 10 years, although the 10-year loan terms normally include a 5-year reset on the interest rate.
The large money-center banks are the most risk-averse and typically must be the predominate lender in any client’s portfolio of capital providers. In addition, these banks seek to control all the collateral the company currently owns.