Posted on Wednesday, January 5, 2011
Banks feeling squeezed by rising regulatory costs are trying to pass along the pain to big corporate borrowers.
In the past several weeks, lenders such as J.P. Morgan Chase & Co. and Bank of America Corp. have begun including in loan documents language that will help banks shift to their large borrowers additional costs triggered by the Dodd-Frank financial-overhaul law.
The changes, disclosed in securities filings by companies from insurer American International Group Inc. to refinery and convenience-store owner Western Refining Inc., reflect guidelines by a trade group of banks and loan investors called the Loan Syndications and Trading Association that might be finalized by February but already are appearing in deal documents.
Under the guidelines, likely to be followed by most banks making corporate loans, lenders can require borrowers to take a financial hit for costs resulting from the Dodd-Frank law "regardless of the date" when the cost-triggering change occurs. The clause doesn't specify whether the new costs would be passed along as a fee or added interest costs, but it says borrowers would pay the lender "such additional amount" to "compensate" that institution.
Previously, lenders generally included the "increased-cost" clause only for situations in which laws or rules changed after a loan agreement was signed. While common, such clauses rarely have been invoked.
Now, though, "banks are very concerned and want the broadest possible protections" in loan documents, said Sarah Ward, co-head of the banking group at law firm Skadden, Arps, Slate, Meagher & Flom LLP. Lenders are jittery about how the financial-overhaul law will be implemented as rules are written and the challenge of "working through the implications of these regulatory changes given the size and diversity of their loan portfolios," Ms. Ward said.
Some borrowers have resisted the new language. Endo Pharmaceutical Holdings Inc., of Chadds Ford, Pa., negotiated a clause that said its lenders, led by J.P. Morgan, are entitled to increased loan fees only if the rules are implemented after the late 2010 credit agreement, according to a person familiar with the deal.
Large and small companies are vulnerable to the language change, though some observers said it is most likely to show up in situations in which a big bank arranges a loan for a company that wasn't lucrative even before the law passed.
Still, banks that press borrowers too hard could lose them to rival financial institutions or to the bond market, which already is benefiting from the reluctance of many banks to make loans. One reason why banks traditionally have been reluctant to pass along regulatory fees to corporate borrowers is that many credit agreements allow borrowers to switch to another lender if the provision is used.
Companies that recently issued high-yield bonds to repay bank debt include Virgin Media Inc., HCA Holdings Inc., and Georgia-Pacific LLC, analysts at Goldman Sachs Group Inc. wrote in a recent report. Virgin Media has cut its bank debt to 55% of the company's total debt from about 80% four years ago.
As of November, corporate borrowing costs were up about two percentage points compared with their average from 1997 to 2007, according to analysts at Goldman.
In addition to higher potential costs for companies, the toughened loan-document provisions could slow the rebound in lending to businesses that has begun at many U.S. banks, especially those that have emerged from the financial crisis with plenty of capital and profits.
"Lenders are going to want to pass those costs through, and since entire classes of lenders are going to be impacted" by the new rules, it's more likely that some will try to use the provisions to cover their rising costs, said Elliot Ganz, general counsel at the Loan Syndications and Trading Association.
While the Dodd-Frank law, passed in July 2010, doesn't target corporate loans directly, costs of such borrowing could increase as a result of a provision requiring packagers of corporate-loan products to retain the risk of what they are selling to other investors, Mr. Ganz said. International capital rules being implemented in the U.S. by the Federal Reserve and other regulators also likely will lead to higher costs.
Some corporate borrowers haven't balked at the new language. In a recent bridge-loan commitment to help fund an acquisition, real-estate investment trust HCP Inc. agreed to the provision with a group of banks, including Citigroup Inc. and UBS AG, because the Long Beach, Calif., company didn't intend to use the loan commitment and because the rest of the increased-cost language was kept the same as a past credit agreement, a person involved with the deal said.
Other companies with the new language in their recent borrowing agreements include First Solar Inc., Thompson Creek Metals Co., Crestwood Midstream Partners LP and Internap Network Services Corp., according to regulatory filings.
WAL STREET JOURNAL
By AARON LUCCHETTI