Why the rush to pay down outstanding borrowings on a credit facility?

Texas Tea's picture
Rank: Senior Gorilla | 914

I was reading about a company's announcement of a convertible preferred offering and the intent to use proceeds to pay down outstanding borrowings on its credit facility. I'm trying to get some clarity on why companies are always in a rush to pay down these borrowings. I understand the nature of credit revolvers, but at the same time these borrowings don't really cost the firm much. Seems like a balancing act of maintaining just enough of a borrowing base; is there more to it than that?

Comments (9)

Jun 14, 2013

That interest thing that debt costs? also gives the firm greater flexibility in the future. some will have clean up provisions too.

Jun 14, 2013

It has do with internal projections. You ask why they want to pay down their credit facility. It can be for many reasons, their WACC could be higher than they want and they see an opportunity to lower it with a convertible offering. Or they could be overweight in credit and want to re-balance with more equity. There are lots of reasons as to why they might be doing this.

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Nov 29, 2013

I'm on a smartphone and can't figure out how to start a new thread, so ... Can someone point me to or explain the pros and cons of term debt vs a facility?

I get the flexibility of a line of credit, but you would think that the tradeoff would be a higher interest rate (as with a credit card), but that is not necessarily the case in real-life corporate examples ...

Nov 29, 2013
bortz911:

I'm on a smartphone and can't figure out how to start a new thread, so ... Can someone point me to or explain the pros and cons of term debt vs a facility?

I get the flexibility of a line of credit, but you would think that the tradeoff would be a higher interest rate (as with a credit card), but that is not necessarily the case in real-life corporate examples ...

RCFs can have restrictive true up provision (have to make the balance 0 for one month every year or so), you have to pay commitment fees (40bps of margin, which never covers the cost of keeping the line open for the bank). But they often have good security packages and are a relationship product, so can be offered as a loss leader from the bank hoping to get M&A work later on. Remember that banks' Ops guys are huge, paying in and out on the RCF really isn't an issue. So they can give it as a free option. RCFs usually have a maturity before the underlying TLA etc.The flexible repayment also can (big can, not always the norm) elevate the bullet nature, or term debt, and it can also be drawn (if in compliance with covenants) at time of distress. RCFs mean very different things for different companies though.

Term debt gives you certainty, and some just don't need the RCF.

Nov 29, 2013
Oreos:

banks' ops guys are huge

you mean their ops divisions are huge, right?

Thanks for the explanation

Nov 29, 2013
bortz911:
Oreos:

banks' ops guys are huge

you mean their ops divisions are huge, right?

Thanks for the explanation

yes. but they can also be fatties, too.

Nov 30, 2013

One more: How about secured vs unsecured? Who gets to access the unsecured market? I'm guessing that the obvious preference by a borrower would be to take out unsecured debt. I was told that the biggest thing is size; you have to be big if you want to borrow at that level. Is this the general idea?

Dec 2, 2013
bortz911:

One more: How about secured vs unsecured? Who gets to access the unsecured market? I'm guessing that the obvious preference by a borrower would be to take out unsecured debt. I was told that the biggest thing is size; you have to be big if you want to borrow at that level. Is this the general idea?

Correct, generally. But bear in mind, when someone tells you that your bond is secured, it depends on what. It could be a empty holdco which then has a back-to-back intercomp loan to the opcos / another holdco so you're once (or more) times removed from the assets, and your "asset" is the loan made by the holdco. Importantly, you are removed from the decision making etc.. as well at the actually assets of the business.

Dec 2, 2013
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