Cash & Liquidity ManagementCash ManagementCash ForecastingEuropean Treasurers Council Analyses Revolving Credit Line Negotiations

European Treasurers Council Analyses Revolving Credit Line Negotiations

The 7 September meeting of the European Treasurers Council (ETC), which took place at the Hotel d’Angleterre, Geneva, discussed many of the pain points affecting treasury teams today. The list included how best to manage merger and acquisition (M&A) activity in a stressed environment, as well as how to balance the expectations of different shareholder types. One thing was clear: the future role of treasury and how to get the right people into the right treasury roles were front of mind for most corporate treasurers gathered in the room.

The main topic under discussion was best practice in revolving credit line negotiations and how to adopt a ‘common sense’ approach. Attendees received an in-depth presentation entitled ‘Solving the Credit Conundrum’, which explained how one treasury group in the food retail sector refinanced its credit facility in 2011. The case study outlined the lessons learned during the process, the tactics deployed in negotiation and the preparatory work beforehand.

The company had kept hold of cash following a takeover. This was a deliberate decision – seen as an ‘insurance policy’ – given the current market uncertainty. The company’s bank relationship policy was based on a syndicate group, meaning it shared its wallet with banks in the group wherever possible. The company would only look outside of the syndicate group if it was looking for a specific process – then it would turn to a specialist provider.

The facility to be refinanced was due to expire in 2012; it had last been negotiated in 2007, when the market was very different.

The last refinancing deal had achieved tight pricing and a sub-facility for letters of credit (L/Cs) issuance, predominantly in the US, which was actively used. During the recent credit crunch, the treasury did not try to extend the facility due in large part to the lack of appetite from the banks. Although the facility was due to expire in August 2012, the treasury knew that a new deal had to be in place by August 2011.

Strategy for Growth

In 2010 the company launched a strategy for growth, looking at new market opportunities and potentially new geographic areas. This meant reviewing the bank group currently in place and re-assessing whether they could offer the capabilities needed both to serve the current business needs but also future needs.

The credit environment in 2010 was not as harsh as it had been in 2008 and 2009, but was still very different from 2007 when the company last refinanced the facility. Its targetfacility size was €1.2bn, which was the same as the existing facility.

The company had a relatively inflexible wallet, in that 56% of its cash management went to three banks: one in the US and two in receiving income flow and five were just getting the commitment fees from the facility.

The ETC attendees were reminded how important it was to manage the board’s expectation as to how the landscape had changed. In early 2010, treasury had received quotes for 120 basis points (bps), yet the starting margin on the existing facility was 35bps. This was something that the treasury group had to make the board aware of, particularly the chief financial officer (CFO).

There were a number of questions posed to the treasury team by the board:

  • How would the deal be structured? Club/relationship, syndication, or fronted/agented L/C?
  • What would the pricing and covenant language be?
  • Which bank would be used for certain roles and why?
  • Which banks were likely to stay and which would exit?
  • What were bank revenue expectation and could these be met with the projected wallet?
  • What capabilities did the company want from the banks in future?
  • Could alternative banks be identified early and could a relationship be cultivated with them in advance?

In essence, the treasury was faced with a credit conundrum. Would there be a sufficient business case for the banks to enter into a new facility at a price that the company could live with? If not, would it be forced to pick up more banks which may not have the right capability set for the company in order to get the credit that it needed?

Regulation, specifically Basel III, also created obstacles. The BIS study at the end of 2010 inferred that for every 1% of increase in Tier 1 capital there was going to likely be a 12-15bps increase in lending margin. For example, if Tier 1 capital was going to go up by at least 4% then that represented a 60bps increase.

Preparation is Key

Early in 2010, the company’s treasury department completed a five-year financeplan, analysing how the business was performing and the amount of cash that it generated. The findings of the report determined what the treasury needed to do in order to support the business.

The team explored in detail when the most opportune time was to refinance – settling on the first half of 2011, which gave them 12 months to prepare.

The first half of 2010 was spent researching the market, asking the existing relationship banks to put forward their ideas and their market analysis on where they saw pricing, and where the trends were in terms of deal structure. The team also participated in a peer group session and proposed a level of transparency which impressed the banks after they got over their initial shock.

The second half of the year was spent building on the knowledge acquired in the first half, deepening the teams understanding of market dynamics, particularly gauging where the potential credit appetites of the banks were, but also beginning to manage the expectations of senior management in what they could expect to see in any new facility, where it would be priced, the incremental costs to the business and why it was necessary to make a move a year earlier than the actual maturity date of the facility.


The specific tactics the treasury team used in the refinancing process are outlined below:

  • Exploiting a competitive market: created price tension by making it known that the company was considering 10 to 16 banks.
  • Creating a credit participation and pricing assessment table, tracking all bank pricing and the level of credit participation. This actively steered banks as to whether they were in the same ball park as peers.
  • Awarding of refinance roles: no pre-approved credit participation; no consideration for active role in refinancing.
  • Selecting an external counsel who was experienced in this type of deal but also knew which counterparts on the bank side would be easier to deal with; this appointment ended up guiding the documentation agent to a particular law firm and specific partner.


The first quarter of 2011 was spent “dotting the i’s and crossing the t’s”. The company finalised their approach to the refinancing deal and the structure it was going to use. In the last week of April 2011 the new credit line facility was launched. The banks were kept to a seven-week timeframe and in the first week of June the treasury signed the new credit facility agreement. The company now has 14 banks in the facility, with three new banks, and the credit facility was 55% oversubscribed.

Lessons Learned

The treasury team learned that preparation is key, stressing that it isimportant to understand the market, know which banks to retain, which to retract and which should leave the facility. It was also an idea to gauge the credit appetite of the banks early and seek their pre-approval.

The bank relationships were an extremely important part of preparation and treasurers were advised to establish a way of working early on in the process. With a European deal it was advisable to use European bank teams, and to blend tried and trusted banks with the ‘new kids on the block’. The document agent was thought to be a key role as it could aid or hinder the agreement process and the use of incentive based pricing could be beneficial as it could improve performance.

For the internal treasury organisation it was important to involve the whole team and ensure there was a share of the wallet as well as a capability scorecard.

As with all projects, hindsight is a wonderful gift and there were a number of improvements highlighted for ETC members. These included:

  • Reduction in arrangement fees – post deal review confirmed mid-range to tight but could be better.
  • Fully self-arrange – in relationship deal you do most of the work anyway.
  • Reduce the bank group – ideally target a group of around 10 banks.
  • Get Basel III carve out.
  • Remove the leverage ratio covenant.
  • Select a more flexible documentation agent.

The Basel III carve out was of particular interest to ETC members and the company explained that they had already secured it for the previous credit facility. Although this time they didn’t get the carve-out they wanted, they were able to insert an increased cost clause which would ensure a transparent breakdown. This meant the company would have the option to exit or cancel the bank’s participation without penalty.

Liquidity premiums were another worry for the ETC group members, particularly in the current market climate. The company had included the premiums in their discussions, due to the fact that the costs compared to some of the pricing. The company had openly asked banks how they would themselves make money from the deal if they were under the margin. The common answer was that the bank simply did not want to lose out on the client and so was willing to take some of the pain. Today, the pricing has stabilised and is even beginning to creep up again.

One member of the ETC group questioned the 55% oversubscription on the facility. The company felt that the balance was between taking too much and the facility size was based on the business profile with some capacity of movement within it. One thing the company did do was take out a lot of the restrictions over M&A activity. Therefore, the treasury could use the spare capacity that was not being utilised by the L/Cs for M&A activity, if it wanted to.

One thing is clear from this informative case study: preparation is key to negotiating the facility which is right for your business.

European Treasurers Council

The European Treasurers Council (ETC), established by gtnews and sponsored by Deutsche Bank, provides a forum for high-level treasury professionals to meet face-to-face to discuss issues and solutions.

This year the ETC has convened in London, Frankfurt and Geneva, with the final meeting of 2011 still to come in Brussels. The locations of the ETC meetings are chosen for the wealth of high-level treasury professionals located in these centres, thought-leaders who are orchestrating the treasury world’s cutting edge implementations.

The next meeting of the ETC will be at the Royal Windsor Hotel in Brussels on 5 December. For information on the agenda, and to apply to join the meeting, email

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