Changing base rates for syndicated loans

Now, if contracting credit spreads and rebounding investor demand are not enough to persuade corporate treasurers and chief financial officers that the corporate bond market offers a viable debt funding alternative to the banks and syndicated loans, there has been a major change to syndicated loan documentation that should make them think again.

The AFR reported last week that the Asia-Pacific Loan Markets Association revised its Australian loan documentation, which is used as the standard for syndicated loans (and RMBS warehouse facilities), in April, to include a market disruption clause. This clause allows a syndicate member experiencing funding difficulties to change the base rate it charges for funds provided, from the standard bank bill rate to whatever its actual cost of funds is.

While this change is intended to address the concerns of foreign banks, which can have difficulty funding in Australian dollars, the change applies to all members of a syndicate.

The additional costs can be levied only by the affected bank, but even Australian banks are now paying well above the bank bill rate for wholesale term debt.

Moreover, if an Australian bank subsequently sells down its participation in a syndicate to a foreign bank, the risk of an adverse change in the base rate increases.
The problem for corporate borrowers entering into syndicated loans now, is that they will never know what their eventual cost of debt will be. Even if borrowings are undertaken at fixed rates this problem may not be avoided; it will depend on whether borrowings are entered into at specified fixed rates of interest or interest rate swaps are subsequently undertaken.

At least in the bond market if borrowings are undertaken at the bank bill rate plus a credit margin or at the swap rate plus a credit margin, the base rate will remain unchanged for the life of the bond issue.