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• Refinancing involves replacing an existing loan with a new loan that fully repays the original loan. The new loan should ideally have better terms and conditions that justifies the process. Refinancing company's debt in response to market conditions like favourable interest rates can go a long way towards strengthening financial position of the company. 

 

• Increased competition among lenders in the corporate debt financing market is leading many companies to evaluate refinancing options. More advantageous terms can extend repayment profile, free up cash flow, or even increase their leverage.

 

• Unlike equity, debt can often be refinanced to suit changing corporate objectives and dynamic market conditions. And because debt terms negotiated even one to two years ago can be substantially different from the current environment, refinancing allows companies to “refresh” their debt facilities to current market terms and conditions.

 

• It is sound business practice to annually review a company’s debt structure to determine:

 

1. if the debt facility maps well to the company’s current business model; and

2. if the terms and conditions would compare favourably to optimum terms and conditions in the current market.

 

 

Rationale for Refinancing

 

• Lower pricing: Lower margin on the new refinanced debt for the whole tenor of the debt results in significant interest cost saving.

 

• Extra financing: Refinancing is generally accompanied by mobilising debt higher than the original debt, provided it meets with leverage condition of a company, thereby generating additional liquidity.

 

• Covenant light structure: Companies with improved credit quality can negotiate debt with less covenants and/or favourable covenant thresholds.

 

• Reduced security coverage: An improvement in credit quality results in company able to get a lower security coverage.

 

• Increase in tenor: The tenor of debt is usually stretched at refinancing which reduces asset liability mismatch and reduces the annual amortisation.

 

• Reducing the number of lenders: Refinancing can also be conducted for changing the lender composition, hence, dealing with a smaller number of banks.

 

• Loan Consolidation: Refinancing is also executed to consolidate few loans thereby putting banks on similar terms, which is logistically a better position for the company.

 

• Reduced annual outflow: Refinancing is with longer tenor thereby reducing annual amortisation.

 

• Shift from project finance to general corporate structure: Debt mobilised on a project finance basis is watertight which after few years of good track record can be refinanced by a general corporate debt which is less onerous.

 

• Prevent breaching terms: Refinancing can also be conducted if the company foresees breaching of terms of existing debt.

 

 

Cost for Refinancing

 

• Prepayment penalty: Usually, term loans have a penalty for early repayment, which is much harsher for initial years.

 

• Fee: Mobilising new debt will have an incidence of an upfront fee to be paid to lenders.

 

• Unwinding of swaps: If the existing debt has an attached interest rate swap; the swap will need to be unwound which in adverse scenarios (if swap is out of money) has a cost to be paid to the swap counter party.

 

• Relationship impact: Prepaying a bank will generally have a relationship impact unless the existing bank is part of the refinancing exercise.