Forward Start Facilities back on the horizon again

The credit markets are getting choppy – are we likely to see the re-emergence of the Forward Start Facility? – a popular innovation during the global financial crisis

A looming recession coupled with rising interest rates will throw up many different challenges for borrowers, with available liquidity of primary and in some cases, immediate concern. Borrowers may look to drawdown revolving credit facilities, increase working capital lines or tap accordions where available. One structure that last appeared in the immediate aftermath of the global financial crisis in 2009 was the forward start facility. It is a structure that can serve as a solution that suits both borrowers and relationship lenders alike and one that may well be seen with increasing frequency in the coming months.

With liquidity so high on the financing agenda, we take a quick look at the key features and benefits of forward start facilities below.

What is a forward start facility?

Under a forward start facility, the borrower will enter into a new facility agreement with a group of banks. The syndicate is likely to comprise a subset of the borrower's main relationship bank group, but may also include new banks. The borrower's existing facility will be kept in place, rather than it being cancelled, and is left to run to maturity.

The forward start facility will have an availability period that will commence at the point in the future when the existing facility matures (typically known as the "Forward Start Date"), but will nevertheless be a committed facility from the date it is signed. Only the existing facility will be available for drawing until the Forward Start Date occurs.

What are the differences from a normal facility?

Typically, the forward start facility will be documented on substantially similar terms to the facility that it is designed to replace. However, there will be some key structural differences:

• Availability Period: as outlined above, the availability period for the new facility will commence only when the existing facility matures
• Purpose: the initial purpose of a forward start facility will be to refinance the existing facility that it replaces
• Pricing: assuming the bank group is a subset of lenders under the existing facility, the borrower will normally pay 'top-up' fees/margin to compensate those banks who have agreed to provide the 'forward start' liquidity. Prior to first drawdown of the forward start facility, the borrower will make payments to the lenders which have the effect of uplifting the level of the margin or commitment fees payable under the existing facility. 'Top-up' fees will only be paid to lenders participating in both the existing facility and the forward start facility
• Prepayment and cancellation: if the existing facility is prepaid and cancelled to a level below the level of the forward start facility, the lenders under the forward start facility will typically require that an equivalent amount of the forward start facility commitments are also cancelled
• Transfers: the transfers regime under the forward start facility will need careful thought. If the forward start facility syndicate comprises a subset of existing facility banks, the borrower may seek to impose a restriction on transfers in the forward start facility while the existing facility continues, so that for any transfer made by a lender under the existing facility, an equivalent transfer must be made under the forward start facility – effectively linking together the two sets of commitments
• Amendments and waivers: most of the time, the two facilities will run independently. However, depending on the commercial agreement between the parties, provisions can be included in the forward start facility to ensure that amendments are only permitted if applied to (and accepted under) both facilities.

Should lenders be concerned about double exposure?

As with any refinancing, lenders participating in both the existing and the new facility will be keen to ensure that there is no double commitment exposure in respect of the existing and the forward start facility.

There are various safeguards that can be included in the forward start facility to mitigate against this scenario, some of which have already been outlined above, such as the refinancing purpose clause and availability period structure.

However, if the forward start facility is for an amount that is less than the amount required to refinance the existing facility, the lenders may require evidence that the borrower has sufficient resources to repay the balance of the existing facility. This is important to ensure that the lenders that are participating in both the existing and the forward start facility are repaid in full under the existing facility, rather than merely sharing – pro rata – in the redemption amount with the other existing lenders.

Cashless rollover mechanics may also be incorporated in the forward start facility (assuming the agent banks are the same under both facilities) so as to allow forward start lenders to be deemed to have satisfied their obligations to lend under the forward start facility by directing the agent to apply the redemption amounts received under the existing facility towards making the new forward start facility loan.

In order for the above mechanics to operate in practice, borrowers will need to ensure that they are not obliged under the terms of their other debt instruments to apply the proceeds of the forward start facility to discharge that other debt ahead of the existing facility.

Notwithstanding the above techniques, lenders in forward start facilities will still need to assess the internal capital treatment that will apply to any forward start facilities in which they participate.

What are the pros and cons for a borrower?

The primary advantage of a forward start facility for a borrower is to eliminate refinancing risk. It will have locked in commitments at a fixed price – which can be key in a potentially volatile and/or rising pricing environment – although the borrower must be prepared to pay a premium for what is, effectively, an insurance policy.

Putting in place a forward start facility at a time when there is no immediate maturity threat hanging over the borrower allows the borrower the time to reassess its bank group going forward. Embarking on a forward start facility process gives the borrower an earlier indication of those banks that will be prepared to support it in the medium term. The borrower also only pays 'top-up' pricing to those of its existing banks that are providing commitments beyond the Forward Start Date, thereby only compensating those banks prepared to commit longer term liquidity.

If the lenders require certain provisions to be tightened in the forward start facility over the position contained in the existing facility, then the borrower will have to comply with those terms from the date the forward start facility is entered into, otherwise a default under the forward start facility would entitle the lenders thereunder to terminate the forward start facility and remove the future liquidity it would otherwise provide to the borrower.

What are the pros and cons for a lender?

The lenders that agree to continue the relationship will receive an upfront fee for the forward start facility at a much earlier point than the usual refinancing cycle. The existing facility pricing can be adjusted through 'top-up' pricing mechanics highlighted above.

From a relationship perspective, borrowers will greatly value (and therefore reward) those of its relationship lenders that are able to commit to extend by participating in the forward start facility. Existing lenders who are unable to support the borrower in the forward start facility will be left with existing facility terms and pricing.

A lender will, however, need to be comfortable that the pricing that it agrees upfront in the forward start facility will still remain viable once the forward start facility goes 'live'.

Ashurst has extensive experience in advising on forward start facilities.

Please do reach out to your usual Ashurst contact should you wish to speak about any of the above or other financing or liquidity concerns.