In today’s fast-paced and dynamic world of syndicated lending, selecting a proactive and efficient facility agent is pivotal in ensuring the success of a transaction. But what exactly does an independent facility agent do, and what are the benefits of appointing one? Caroline Horvath-Franco, Director, Business Development in Kroll’s Agency and Trustee Services practice, examines the key elements of the role and details five key benefits of appointing an independent facility agent in a syndicated loan.
What is a Syndicated Loan?
Broadly speaking, it is a loan financing in which two or more lenders provide loans to a borrower (or multiple borrowers). Syndicated loans are generally used for larger and more complex financing arrangements, allowing borrowers to access large amounts to finance capital-intensive projects, such as leveraged buyouts and acquisitions.
A syndicated loan is often a useful way for lenders to spread risk or to extend a larger loan than they would be able to do individually, and it allows more geographical and institutional sharing of risks.
According to AFME’s Q1 2023 report, European leveraged loan issuance totalled EUR EUR 29.1 billion (bn) in Q1 2023. While down 29.4% from EUR EUR 41.2 bn in Q1 2022 and the record high of EUR EUR 85.1 bn in H1 2021, this represents an increase of of 9.2% from the Q4 2022 European leveraged loan issuance of EUR 26.6 bn. In Q1 2023, the quarterly supply of leverage loans stood at EUR 29.1 bn, an increase of 9.4% quarter-over-quarter and a decrease of 33.4% year-over-year (YoY). It is encouraging to see activity levels increasing following a dislocated and choppy 2022 market as high inflation, rising interest rates and recession risk cooled leveraged loan issuance. With a significant maturity wall coming in 2025, independent facility agents such as Kroll stand ready to assist in a nimble, proactive and solutions-driven manner.
What is a Facility Agent?
The facility agent (or the agent) is the representative of the syndicate of lenders and can be seen as the primary point of contact between the lenders and the borrower. It provides the borrower with a single touchpoint for the day-to-day running of the loan facility(ies) and sharing of communication and correspondence, such as financial reporting requirements.
The role of the agent is multifaceted and includes key duties such as interest calculations of the facility, managing the payment activity of deal closings and drawdowns, and general loan administration such as waivers, consents and amendments. The agent’s duties are administrative and mechanical in nature, serving as a conduit between both sides with no fiduciary duties.
While the lenders appoint the facility agent to act as their agent under the loan agreement and wider finance documents (and accordingly the agent will act on the instructions of the lenders), it is the borrower that ultimately pays the fees of the agent. Therefore, the appointment of the facility agent is one that all deal parties should be comfortable with, given it has a central role in the smooth administration of the transaction.
What are the Benefits of Choosing an Independent Facility Agent?
1) Independent and Conflict-Free
Lenders are often tempted to leverage their internal teams to undertake the role of facility agent for reasons such as an additional income fee stream and in the interests of the borrower/sponsor relationship. However, this can lead to issues during the life of a loan.
In some deals, the entity that acts as both a lender and the agent can find itself conflicted between acting in the best interests of its own institution vis-à-vis the interests of the wider lender group. An independent facility agent (such as Kroll) has no economic interest (or “skin in the game”) in the loan or borrower group beyond its agency fee and will, therefore, always act as an impartial party. This helps ensure a fair and level playing field for lenders and will never bring into question the agent’s neutrality.
Following the global financial crisis of 2008-2009, distressed debt gave rise to conflict issues where a party had multiple roles on a transaction (such as an entity acting as both lender and agent). In such circumstances, given their nature, large lending institutions were sometimes unable to take swift and cooperative action to the deal parties’ satisfaction, resulting in the role of the agent being stringently reviewed. Independent agents, including Kroll, were, and continue to be, able to fill this gap either through new money issuance or as a replacement to the incumbent agent on the transaction.
2) Efficient, Flexible and Streamlined Processes
The selection of the agent is, in general, one of the last roles to be appointed on a syndicated loan as deal parties look to agree on the commercial terms of the loan first. This combined with deal timelines becoming even more aggressive in today’s fast-paced lending world often results in agents being required to onboard, review and execute documents within days rather than weeks.
Independent agents are more likely to be able to meet these timelines since they have streamlined know your customer (KYC) procedures, less internal bureaucratic processes and a more flexible and nimble approach to documentation review.
Independent agents can often review and sign off on the finance documents with greater speed, given the specialized market knowledge within their deal teams and non-existent—or minimal—internal committee meetings and checklists.
On average, Kroll, for example, is able to turnaround KYC and finance documentation review within 24 hours of receipt. This flexible approach is invaluable to the success of a deal where each hour counts, and it ensures deal deadlines can continue to be met.
3) Reduced Trade Settlement Times
Trade settlement times have often been a hot topic for all deal parties with this being high on the agenda of the Loan Market Association (LMA) discussions. According to the LMA website, the median figure for a secondary par trade to settle at the second quarter of 2022 is 39.8 business days (The market target is 60 business days from trade date)
As a result of the streamlined onboarding procedures mentioned above coupled with tailored loan system infrastructure and expert market knowledge, independent facility agents such as Kroll can often settle par trades (and distressed trades for that matter) well inside of these market standard time frames, which is advantageous to the primary syndicate as well as the underwriter(s)/lead manager(s).
This is also crucial in the context of the commercial mechanics of the trade between buyer and seller and avoids pulled trades and compensation being sought by one of the trade parties against the other.
Managing interest calculations, amendment and consent matters and distribution of financial information requires a unique skillset. Even without considering the operational knowledge and infrastructure required of facility agents as a result of London Interbank Offered Rate (LIBOR) cessation, rate fixing can easily be miscalculated. For example, a simple human error of missing a credit adjustment spread can result in a loss of return to the lender or an underpayment of interest by a borrower.
A similar added value of an independent agent can also be experienced when waivers, consents or
amendment matters are in circulation. Loan agreements are often amended to meet the changing requirements of the borrower group during the term of the loan, and these will usually be executed through a formal document such as an amendment agreement that requires lender consent (unanimous lender consent, majority lender consent or a different lender consent threshold).
Given the fact that a syndicated lender group can comprise any number of entities, sometimes running into many hundreds, obtaining majority lender consent is an administratively burdensome task, which requires exemplary attention to detail, strong communication skills and superior technology systems to ensure that these matters are executed accurately. Missing a single lender response or providing incorrect calculations can have wide implications on the outcome of the matter causing reputational damage to the agent.
Having a fully committed and experienced agency team provides real value to all parties through timely and accurate updates on the status of the consent matter. There is solid rationale to giving due consideration to the value an independent agent offers, ensuring a smooth end-to-end management process and a premier tailored service.
5) Added Value in Distressed Scenario
Given the current macroeconomic environment, it will not be surprising if we witness a higher occurrence of distressed loans as we head into the tail end of 2022.
Deal parties should consider an agent’s risk appetite from inception and its ability to continue administering the deal as macroeconomic factors come into play. Non-independent loan agents may have a reduced risk appetite due to everchanging laws and regulation and internal policy requirements. When a deal starts to become distressed, a bank agent may look to exit the deal, especially if they have sold their entire commitment. Banks may also change their strategy or balance sheet composition and look to exit certain deals, for example, when the bank’s appetite for certain jurisdictions or industries change.
While independent facility agents are readily able and available to succeed the incumbent and step into their shoes seamlessly, this is a timely and costly task, which, coupled with commercial deal pressures, may not be viewed too favorably by the deal parties and can negatively impact existing client relationships. Appointing an independent agent from the outset may minimize this potential issue further down the line and save considerable time and money. Notwithstanding the challenges, Kroll is highly experienced at transitioning live distressed/performing agency roles in a compressed time frame.
A loan that is not performing requires a facility agent that is responsive, nimble and can move quickly to protect the lenders’ positions 24/7. Being independent is key in this scenario as it allows a facility agent to showcase all these characteristics without having to consider any other internal factors or pressures. The cross-border nature of many transactions also adds a layer of complexity, and many established independent agents, including Kroll, are set up with a global platform that can be accessed by any of its employees anywhere in the world.
In conclusion, an independent agent can add immediate real value to a deal by offering efficiency, experience and knowledge—it’s often all that they do and can be more cost-effective in the long run. Independent agents can build strong long-term relationships as deal parties are safe in the knowledge that the agent is almost certain to stay as incumbent for the duration of the loan facility, irrespective of whether the loan is performing or non-performing.
Deal parties welcome greater options when appointing service providers to ensure the agent role continues to evolve positively to meet the ever-changing regulatory landscape, market (and sponsor) requirements and the cross-border nature of deals. These factors drive technological advancements of an agent’s infrastructure and ensure lenders continue to benefit from experienced loan market individuals.
While this article focuses on the traditional lending market of syndicated loans, it’s important to mention that appointing an independent facility agent is equally crucial in the private debt market. Currently, in the private debt fund space, there is around USD 400 bn in unspent capital “dry powder” and USD 1.2 trillion in assets under management. Kroll continues to excel in this growing market with our premier agency service offering.
Established in 2017, Kroll’s highly experienced team of over 70 individuals administer a live portfolio of over 650 loan, capital markets and escrow agency deals. We welcome the opportunity to discuss your agency and administration needs. You can learn more about Kroll’s Agency and Trustee Services practice and experts here.