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.
However, in return, these institutions typically provide the most aggressive pricing, as the lenders focus on other ways to generate fees from the company/borrower. The regional banks have taken up the slack from the money-center banks and have experienced the largest portfolio growth in this sector.
Small capitalization and/or local banks are typically lending on loan-to-value (LTV) ratios based on the appraised value of the borrower’s fee-simple properties. All of the lenders have generally reverted back to a 1.25-fixed-charge coverage ratio (FCCR) or debt service coverage (DSC) ratio.
Some of PetroCapRE’s clients are moving away from the regional banks and back to local banks that have “covenant light” requirements, typically only an LTV and FCCR/DSC ratio. The client’s desire for “covenant light” loan terms is due to the increasing oversight of their business by the larger lenders. The increased desire for greater borrower oversight is being driven by new banking regulations resulting from the much-anticipated implementation of the federal Dodd-Frank statute.
These rules are not just potentially burdensome for your company but also for the banks that now have to pay new fees and compliance expenses each year to comply with the Dodd-Frank regulations.
Our next note will focus on the effects of Dodd-Frank at both the bank and at the borrower level.
John C. Flippen Jr., jflippen@PetroCapRE.com, and PetroCapRE (www.PetroCapRE.com) provide buy-side acquisition and capital restructuring services. PetroCapRE focuses on superior service, providing clients with a comprehensive array of strategic advisory and execution capabilities. The company’s in-depth strategic planning and proprietary modeling tools give its clients a thorough understanding of how to evaluate complex potential acquisitions and recapitalizations from multiple perspectives.
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