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Revolving Credit Facility

Understand the Revolving Credit Facility

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Revolving Credit Facility

Revolving Credit Facility: Fee Structure

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

  • Upfront Fees
  • Utilization/Drawn Margin
  • Commitment 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 the 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.

Revolving Credit Facility: Utilization/Drawn Margin

The utilization/drawn margin refers to the interest charged on what’s actually drawn by the borrower, which is typically 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:

  • Investment Grade Borrowers: 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.
  • Leveraged Borrowers: For leveraged borrowers, the pricing grid will be based on credit ratios such as Debt / EBITDA.

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Revolving Credit Facility: Commitment Fees

Lastly, the third type of fee charged is the commitment fee.  These refer to fees charged on the undrawn portion of the credit facility and are 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, 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.

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