What is Revolving Credit Facility?
The Revolving Credit Facility (“Revolver”) refers to a common loan that acts like a credit card for large companies and, along with Term Loans, is a core product in corporate banking. With a revolver, the borrowing company can borrow at any time up to some predefined limit and repay as needed over the term of the revolver (usually 5 years).
Revolving Credit Facility: Fee Structure
The corporate bank puts together the loan for its corporate clients and charges the following fees:
- Upfront Fees
- Utilization/Drawn Margin
- Commitment Fees
Upfront fees are paid by the borrower to the corporate bank for putting the facility together, which are usually sub-10 basis points per year of the tenor.
For example, a strong investment grade borrower enters into a 5-year $100 million revolver may pay 30 basis points (0.3%) on the total $100 million facility size on day 1, which equates to 6 bps a year.
The longer the tenor, the higher the upfront fee will be.
Revolving Credit Facility (RCL) Examples
Revolving Credit Facility: Utilization/Drawn Margin
The utilization/drawn margin refers to the interest charged on what’s actually drawn by the borrower, which is typically priced as a benchmark interest rate (LIBOR) plus a spread.
For example, if the borrower draws $20 million on the revolver, the fee on this drawn amount will be LIBOR + 100 basis points.
The spread will depend on the underlying credit of the borrower via two pricing grid mechanisms:
- Investment Grade Borrowers: For investment grade borrowers, their pricing grid will depend on their external credit ratings (from agencies such as S&P and Moody’s). An example of an investment grade pricing margin would be: LIBOR + 100/120/140/160 bps depending on whether the credit rating was A- or better/BBB+/BBB/BBB-, respectively.
- Leveraged Borrowers: For leveraged borrowers, the pricing grid will be based on credit ratios such as Debt / EBITDA.
