Monday, October 19, 2009

Amend and Extend or Amend and Pretend?

In the last 6 months, we've seen a number of "amend and extend" transactions. Typically they involve:
  • The extension of the maturity of a term loan and/or revolver (typically for syndicated, non-investment grade loans). This is only for lenders who agree to the extension (i.e. some lenders may keep the original maturity).
  • Increasing loan pricing for lenders who agree to extend (to reflect current market conditions and the higher credit risk of the borrower) and an amendment fee.
  • Covenant relief for the borrower (reflecting operating performance below original the targets).
Why an Amend and Extend?
During normal economic times, a borrower would do a new syndication as the maturity date for an existing facility approaches. So why are we seeing amend and extend agreements rather than new facilities? Because many of these companies would have a hard time getting a new syndication done. The loan market is much more selective for high risk credits, and many of these companies have high leverage and weak cash flows.

Amend and Pretend?
It is clear why a borrower would want an amend and extend (despite the higher cost) - they get covenant relief and one or two more years to turn around the business and generate cash for debt repayment. But why are lenders agreeing to these transactions? Do they really
believe the borrowers will be able to repay the loans 2 years later, or are they just deferring the day of reckoning - the day when the borrower will need to do a major financial restructuring (or even a bankruptcy) and the lenders will have to write down the value of the loans? Is it an "amend and extend" or "amend and pretend" (that the loan will actually be repaid some day)?


Anonymous said...

It seems to me that banks (and borrowers) are just "kicking the can down the road" by doing an amend and extend. Some of these companies (and loans) are zombies. They'll never be able to repay the loans, but banks can't take the capital hit today that would come from a restructuring. So they extend the loan and hope for the best.

rcanirban said...

I disagree, anonymous. I keep facing this problem of 'whether we should take a hit now or should we create some breathing space for the customer and maybe take a marginally smaller hit 6 months later?' Now I know that in some cases it may come back to me as 'amend and pretend', but as responsible Bankers we have to take decisions at times which may appear to be irresponsible say a year down the line, with the benefit of hindsight. We need to remember that bankers are not astrologers, and especially during these recessionary times it is always a gamble when you try to help out an ailing business. What is important now is to understand the customer's integrity (how much reliance can we place on his order book/future income streams)- tell me, is there any, repeat any, foolproof way of doing that?

Ken M said...

Amend and extend works when there is still trust in senior management, the banks collateral is safe from shrinkage and the borrower can still afford to pay the interest on the loan. If the bank is relying on a refinance of its loan to get out, it makes no sense to force the issue now when there is not any new loan funding available. Furthermore, liquidation of collateral in an oversupplied market will only cause a greater loss than if the assets were liquidated in an orderly process over time. Proceeds from the orderly liquidation reduce the bank’s exposure thus minimizing loss. On the other hand, if the borrower is burning cash at a rapid pace and the borrower cannot furnish a realistic business plan on how it can continue to pay the debt service over the extension period, then the extending makes little sense.

rcanirban said...


Thank you for putting across my views so succintly.


Walt French said...

Why this Manichean view? An A&E is BOTH a resistance to taking a stress-intensifying loss (now) AND reasonably taken when there is a decent chance of a better outcome tomorrow.

A seriously stressed bank gains optionality even if the odds of a better outcome a year or two from now are not better than 50-50. At least the bank's equity is not wiped out instantly, so how can that be bad for equity holders?

The issue, as spelled out so lucidly in Akerlof & Romer's "Looting…", is whether the actual stakeholders in the bank (especially the FDIC as a rep for Uncle Sam) are also advantaged by the A&E terms.

That paper's a must read for anybody who thinks the banks are operating in uncharted waters: there's a playbook for what they're doing. Without spoiling too much of the plot, the moral hazard cost the US taxpayer somewhere North of $100 billion of 1980's dollars, thousands of institutions failed, and felony convictions resulted, too.

arthur james said...

if profits, cash flow, etc. are only temporarily depressed because of poor economic conditions and you believe the market and performance will eventually improve, then you should certainly consider extending the debt provided the underlying business is strong and not burning cash, which would result in the banks exposure increasing.

Ron Carleton said...

If the loans are underwater today and we amend and extend hoping for an improvement in the company's performance so that they will someday be able to repay the debt, aren't we taking equity risk and shouldn't we get equity returns?