Wall Street Prep

Revolving Credit Facilities

Learn Online Now

Revolving Credit Facilities

Revolving Credit Facility Fees

The corporate bank puts together the loan for its corporate clients and charges the following fees:

Upfront fees

Upfront fees are paid by the borrower to the corporate bank for putting the facility together, which are usually sub-10 basis points per year of tenor.

For example, a strong investment grade borrower enters into a 5-year $100 million revolver may pay 30 basis points (0.3%) on the total $100 million facility size on day 1, which equates to 6 bps a year.

The longer the tenor, the higher the upfront fee will be.

Utilization/drawn margin

This refers the interest charged on what’s actually drawn by the borrower.  This is usually priced as a benchmark interest rate (LIBOR) plus a spread.

For example, if the borrower draws $20 million on the revolver, the fee on this drawn amount will be LIBOR + 100 basis points.

The spread will depend on the underlying credit of the borrower via two pricing grid mechanisms:

For investment grade borrowers, their pricing grid will depend on their external credit ratings (from agencies such as S&P and Moody’s).

An example of an investment grade pricing margin would be:

  • LIBOR + 100/120/140/160 bps depending on whether the credit rating was A- or better/BBB+/BBB/BBB-, respectively.

For leveraged borrowers, the pricing grid will be based on credit ratios such as Debt / EBITDA.

Commitment fees

Lastly, the third fee charged are Commitment Fees.  These refer to fees charged on the undrawn portion of the credit facility, and is usually limited to a small % of the undrawn amount (e.g. 20%).

Why charge for something that isn’t being used? Even though the borrower doesn’t take the bank’s money, the bank still has to set aside the money and incur a loan loss provision for the capital at risk. This is also called the undrawn margin or undrawn fee.

Revolvers vs Commercial Paper

Investment grade companies often have access to low cost commercial paper markets and use revolvers as a liquidity backstop option in case commercial paper markets close.

In these cases, while banks fully commit to funding revolver draws when needed but most of the time the revolver remains unutilized. A revolver only becomes drawn when other funding options are not available, so it is utilized when it has the highest credit risk.

The typically high undrawn amount means the corporate bank is only getting the small commitment fee as opposed to the utilization fees, despite having to put the entire amount of capital at risk. This contributes to revolvers being known as a loss leader.

On the other hand, leveraged borrowers often rely on the revolver as a primary liquidity source to fund working capital and other day-to-day operating needs.

Modeling the revolver

Because the revolving credit facility can be drawn or paid down based on the liquidity needs of the borrower, it adds complexity to financial models.  Learn all about modeling the revolver here.

Step-by-Step Online Course

Everything You Need To Master Financial Modeling

Enroll in The Premium Package: Learn Financial Statement Modeling, DCF, M&A, LBO and Comps. The same training program used at top investment banks.

Enroll Today
Comments
guest
0 Comments
Inline Feedbacks
View all comments
X

The Wall Street Prep Quicklesson Series

7 Free Financial Modeling Lessons

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.