When a company is in financial distress and needs additional financing, the first stage of restructuring is often to review the existing financing. The conclusion may then be to replace the existing financing with new financing or to supplement it with a new loan or credit extension. Ongoing financing is no longer appropriate if the loan, credit, bank guarantee facility or other banking products are too expensive, the terms do not provide sufficient room, or the financing needs to be modified.
Consultation with bank on refinancing
The most obvious route is to consult with the existing financier/bank about refinancing. This is all the more true because when entering into new relationships, banks are required by laws and regulations to do customer research (Know Your Customer and Customer Due Diligence) which takes time.
Look for alternatives
If there is enough time, the existing bank is not willing to refinance, or the terms are not appropriate, another financier can be sought. That new financier can be a bank, but it does not have to be. After the credit crisis, more alternative forms of financing have emerged. Consider:
- real estate finance
- asset financing
- crowdfunding
- informal investors, etc.
In addition, in addition to the (major) banks, many more providers of financing have emerged. It may be worthwhile to explore non-bank financing options as well.
Risks of refinancing
A new lender can take over the existing financing and expand it at the same time, or only take on the expansion of the financing(step financing). With the latter - a new party finances the expansion - it is important to check whether this is permitted by the first financier and whether, for example, permission must be given for collateral to the new financier. If the conditions of the first bank are not met during refinancing, this can be grounds for terminating the financing. This must be avoided.
Another risk when refinancing or providing additional collateral, is that the other creditors may accuse the borrower/debtor that their recourse position has been adversely affected by the refinancing(paulian action) or that this is unlawful. For a bank, this risk is less, but a financed party must keep a sharp eye on this risk when refinancing.
Terms of refinancing
The financial aspects often receive the most attention when refinancing a loan or credit. Can a more expensive loan be converted to one with a lower interest rate? Is the amount to be financed sufficient? Are the interest and repayment rates appropriate, is the mark-up rate not unreasonably high, are there closing costs, are there annual handling fees?
Are the new conditions appropriate?
What is frequently overlooked are the conditions associated with the refinancing: in other words, the legal components. If the conditions for the existing financing can be as similar as possible for the new financing, this has great advantages, especially for the company, in the administration and management of the financing. It often happens that when refinancing, the bank requires more collateral from the customer or, for example, demands that payment transactions take place through the bank or that more information must be provided. Careful consideration must be given to whether the terms of the refinancing in combination with the collateral are appropriate.
Should conditions be expanded?
If the existing collateral, such as pledge and mortgage rights, surety bonds or joint and several liability, has sufficient collateral value (Loan-to-value/LTV), the question is whether an extension of the collateral should be agreed to. If, for example, a pledge on savings is then requested, this could mean liquidity problems, while the banking position does not require this.
Similarly, when requesting a guarantee from the DGA in private in order to get "skin in the game," the strict necessity must be tested. On the other hand, a bank is not obliged to refinance. Negotiating terms and additional collateral should be placed in that light.
Existing collateral remains in place
With most banks, existing collateral remains in place when refinancing. This is often stated in a single sentence, so a client may not always be aware of it. If new collateral is requested during refinancing, such as an extension or increase of the mortgage right, this does not mean that the existing collateral is released. This is only the case if this is expressly stated in writing. The new collateral normally extends in addition to the existing collateral.
That a bank may not demand too much collateral when refinancing is also important in the context of the bank's special duty of care (Article 2 of the General Banking Conditions). The bank must be careful in its services and take the customer's interests into account as much as possible. Read more about banks' duty of care in this article.
Compensation interest
When a refinancing entails repaying an existing financing before the end of the term and therefore early, it must be taken into account that a compensation interest (read: penalty interest) is due. This is because the re-lending of the repaid amount yields a lower interest rate, than the interest rate of the existing loan. In a market where interest rates are rising, this will be less of an issue, but the first lender may charge penalty interest even then if it follows from the financing terms. When refinancing, it is important to check this in good time.
Conclusion
When refinancing as part of a corporate restructuring, it is important to consider not only the financial implications. The entire financing position, including the financing conditions and securities, must be analyzed. This prevents a bank from obtaining too much collateral or setting financing conditions that could still have been negotiated.
