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Sunday, 22 October 2017

The day of reckoning

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Porsche's refinancing of its 2007 €10bn liquidity line earlier this year was decried by many as a textbook example on how not to do it. The Germany luxury car maker had expected to dictate terms in a lenders market, thus missing its original target of €12.5bn and making the redemption after significant last-minute concessions. David Cox reports.

Porsche's refinancing of a €10bn liquidity line put in place in 2007 with a new €12.5bn facility was never going to be easy. Not only was the request an increase on an already chunky facility but the group had provoked fury among its lenders the previous year when it drew the revolver to invest in ostensibly risk-free securities. The margin on the revolver was minute – probably well below banks costs of funds. Porsche undoubtedly did well out of a transaction that tied up a lot of bank capital for very little bank gain. At the time, bankers said the move could prove short-sighted: aggrieved lenders could take revenge when the time came for any refinancing.

When that day arrived, in February, the company initially approached 30 of its core lenders. It quickly became clear that the exercise was not going to be simple. The first major snag was timing: in waiting to approach the market until February, Porsche had misread the market mood. Conditions were almost frozen – even for the grandest of borrowers. Roche, an A-rated and highly anti-cyclical credit, had tapped the capital markets for M&A funding rather than looking to bank loans.

As the credit crunch ground on, once easy lending relationships had been re-evaluated and in many cases scaled back or exited. Quick exits to the capital markets are key. Even for core clients, big ticket credit decisions now often go to board level while credit committees proceed at a glacial pace. Bankers said they had been advising Porsche since autumn 2008 to come as early as possible, especially given the size of the requirement. The decision to wait, presumably in the hope of better market conditions, made the process was more fraught than necessary and probably increased the final interest bill.

The default position for almost all banks is deleveraging, not lending. Those loans that are made are preferably short-term – and certainly gold-plated. Most refinancing loans are now smaller than the facility they replace, and many of the bigger deals are bridges to the capital markets. To go out with a loan that is not only an increase to an already sizeable facility, but also lacks a clear and significant capital market take-out programme, was at best surprising. Considering the reduced number of banks approached, it seems remarkable Porsche found enough lenders to get the deal done.

To make matters worse, for a cuspy investment grade credit in a horrible sector, the price Porsche offered did not impress. It initially went out with a margin of 275bp and fees of 200bp, to a resounding hollow clang. The company was forced to up the fee by 50bp early in the process, with a further 50bp buttered onto the margin on the day prior to final signing. While these yields are some distance away from the 20bp Porsche paid for the original revolver, they are not notably rich in a market where top-rated corporates are paying 150bp for even short-term funds.

Nor was the deal helped by what appeared to be a lack of co-ordination. Although Barclays was officially organising the deal, few were under any illusion about who was in the driving seat.

A day before redemption of the original €10bn facility Porsche had raised just €8.55bn. With negotiations continuing into the night, and the extra juice added to the margin, a further two banks were persuaded to step up. Other syndicate banks – notably German banks – were made to see the wisdom of increasing their commitments. By a hair’s breadth, the €10bn redemption was covered, though the original loan was not actually repaid until the day after it was due.

The new facility is split between two 12-month tranches, including a 6.7bn piece that can be extended for a further year. On closing, an accordion feature was added to allow for further increases. This was largely thought to have been included to allow Japanese banks, which could not join in the first round because their accounting year-end differs from that of European banks, to join at a later date.

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