The development and use of forward start financings to offset refinancing risks for medium to large corporates has grown in Australia over the past 18 months following global (and especially UK) financing trends. Forward start financings were created and became popular in the face of the capital constraints on bank lending characteristic of the global financial crisis.

Forward start financings enable corporate borrowers to reduce their refinancing risks and extend debt maturities in return for providing higher margins on existing loans and additional up-front and top-up fees to those banks in their lending syndicate who are willing to commit to forward start financings. The earlier a forward start is agreed, the greater the return for the committing banks. By locking in a refinancing, corporate borrowers can boost or stabilise investor and underwriter sentiment, creating a more stable platform for any potential equity raising.

Australian corporate borrowers who have recently entered into forward start financings include:

The four major Australian banks - National Australia Bank, Westpac Banking Corporation, Commonwealth Bank of Australia and Australia and New Zealand Banking Group - have been regularly reviewing and participating in forward start financings.

Fees, commitments, conditionality. The timing of lender commitments and associated fee and margin obligations are an ever present issue in forward start financings due to the time overlap of commitments. Borrowers will want fees to start accruing and be paid as late as possible, but without jeopardising early commitments. Some thoughts from recent experiences are as follows:

Repricing risk. As pricing is fixed from the date of the forward start agreement, there is a repricing risk faced by both the borrower and the forward start lenders.

Amendments, waivers and breaches. The forward start agreement will need to deal with whether amendments or waivers to the existing facility (after the forward start agreement is signed) will apply to the forward start agreement. An obvious but important issue to cover is to ensure that entry into the forward start agreement does not breach any terms of the existing facility or other relevant pre-existing agreements.

Capital treatment. No official guidance has been given by APRA or ASIC as to whether a forward start lender has a double credit exposure prior to maturity of the existing facility. If correctly structured the answer should be no.

Use of proceeds. Can proceeds drawn under the forward start financing be used for a purpose other than repayment of the existing facility?

Proposing a forward start financing in a restructuring/workout/watch-list scenario could give a borrower group leverage in negotiations with the current syndicate. Large and diverse bank syndicates can be difficult to mobilise in such scenarios. Unanimous approval may be required under existing agreements for any extension of debt maturity dates, often a key plank in a restructuring. A borrower could entice the bulk of the syndicate to move to a forward start financing, subject to agreement on acceptable margin and fee increases and committing lenders to increasing exposures. Existing facility documentation needs careful review as part of this process to ensure forward start agreements (and associated negotiations) are not themselves breaches requiring unanimous consent. The viability of using forward start financings in restructures also depends on availability of cashflow to service higher up-front and ongoing fees.

Commentators suggest that the momentum in forward start financings could dissipate in the next six to 12 months as (and if) prices for refinancings (and new) financings continue to rise towards pre-global financial crisis levels. If bank lending and capital markets continue to thaw, corporate borrowers gradually deleverage and bank balance sheets become less constrained, refinancing risks and therefore the need for forward start financings may diminish.

Recent experiences with the Australian market indicate that banks have began underwriting new loans and agreeing to refinancing existing facilities, however, these refinancings have been limited to certain industry sectors, such as healthcare.

Forward starts remain attractive for lenders where new margins are substantially higher than existing margins. Forward starts are also likely to remain relevant in the short term, especially for sectors which the banks are weary of maintaining or increasing their exposure, in particular, the commercial property sector.