When a loan or credit facility approaches maturity, the choice usually comes down to two paths. You can ask your current lender to amend and extend it, or refinance with a new lender and pay the old one off. Both can work. Which is right depends on how your lender's term sheet compares with what the wider market would give you, and finding that out takes time.
When to start planning a loan maturity refinancing
Earlier than feels necessary. Common practice among finance teams and their advisors is to begin serious work twelve to eighteen months before maturity, with a decision made while six months or more remain. Larger facilities, or a business whose numbers have softened, justify starting at the longer end.
The reasons are practical. A new lender needs time for diligence, credit approval and documentation, and that process rarely runs faster than planned. Your auditors will also take an interest. Once maturity falls within twelve months of a balance sheet date, the debt will generally be shown as a current liability, which can invite harder questions about whether the business can meet its obligations. A signed extension or committed new facility in hand makes that conversation far easier.
Time also changes your position with the incumbent. A lender who knows you have eighteen months and other options will negotiate differently from one who knows you have ten weeks.
What an amend and extend usually involves
In an amend and extend, the existing lender agrees to push out the maturity date and the credit agreement is amended to reflect whatever it asks for in return. Lenders rarely extend on the original terms. The package depends on the lender and on how the business has performed, but it typically draws from this list:
- A new maturity date, often shorter than the borrower asked for
- A higher interest margin, sometimes with a further step-up later in the term
- An amendment or extension fee, paid at signing
- Tighter financial covenants, more frequent reporting, or new limits on dividends and acquisitions
- A partial paydown of the outstanding balance, or scheduled amortization where the loan had little or none
- Additional collateral or guarantees
Where several lenders share the facility, the credit agreement sets out how many must agree to each change. Moving a lender's maturity commonly needs that lender's own consent, so a lender that declines may keep its original date and have to be repaid or replaced when it arrives. Ask your counsel to walk you through those provisions before negotiations begin.
The appeal is speed and cost. The lender already knows the business, the security package exists, and the legal work is an amendment instead of new loan documents. For a company that is performing and on good terms with its lender, it is often the sensible answer.
When refinancing with a new lender makes more sense
An extension keeps you in the same structure with the same counterparty. That becomes a problem when the structure no longer fits the business. Refinancing tends to be the better route when:
- The company has outgrown the facility and needs more capacity, a delayed draw tranche for acquisitions, or a revolver sized to today's working capital
- Your lender is reducing its exposure to your sector or to borrowers of your size, and the extension terms reflect its own position more than your credit
- A different kind of lender would suit you better, for example an asset-based lender for an inventory-heavy business, or a private credit fund for a company that values covenant flexibility over the lowest margin
- The incumbent's terms are steep enough that a new lender's fees still work out cheaper over the life of the loan
- Every waiver or consent request has become a struggle
Refinancing carries its own costs. The new lender will charge an upfront fee, run its own diligence and may want a quality of earnings report, and legal fees will be higher than for an amendment. The existing loan may carry a prepayment premium, and repaying a fixed-rate loan or unwinding a hedge early can trigger breakage costs. Check the documents before assuming the exit is free.
Keeping your lender's goodwill while you test the market
Most borrowers want to see what the market offers without damaging a relationship they may keep. Lenders are used to this.
Tell the incumbent early that the board expects you to look at alternatives before committing to an extension. Put as ordinary governance, this rarely offends, and it lands better from you than from a competitor. Ask for the extension proposal at the same time.
Keep reporting clean and on time. A late compliance certificate mid-process weakens you with everyone looking at the file.
Be careful with information. Do not pass the incumbent's term sheet to its competitors, and read the confidentiality clause in your credit agreement before sharing anything the lender has given you.
Decide in advance whether the incumbent gets a chance to match the best outside term sheet. Many companies allow it, since a competitive incumbent is often the fastest to close. If you do, say so at the outset and stick to it. A process that keeps reopening loses credibility.
How to compare the two options on cost and flexibility
Put both term sheets on the same footing. Pick a common horizon, usually the length of the shorter facility, and add up every cash cost over that period:
- Interest, using the expected drawn balance and the all-in rate for each year, including any step-ups
- Upfront costs such as extension, arrangement and commitment fees
- Exit costs on the existing loan, including prepayment premiums, breakage and hedge unwind costs, which apply only to the refinancing
- Legal and diligence costs, including the lender's own costs you are required to reimburse
- Required paydowns, which are not strictly a cost but take cash out of the business
Then assess flexibility on its own, because it does not reduce neatly to a number. Test covenant headroom against a downside forecast as well as the base case you showed the lender. Check how much of the balance amortizes, what you can do without asking permission, and how much runway the new maturity really gives you before the same exercise starts again.
A simple illustration
Take a hypothetical company with a $20 million term loan maturing in a year. Its lender offers a two-year extension with a $200,000 fee, a margin increase worth roughly $100,000 a year in extra interest, and a $2 million paydown at signing. A new lender offers three years at a margin worth about $50,000 a year more than today, a $300,000 upfront fee, and around $250,000 more in legal and diligence costs than the amendment would need.
Over a two-year horizon, the extension costs about $400,000 in fees and extra interest. The refinancing costs about $650,000. On cost alone the incumbent wins. The refinancing, though, leaves the $2 million in the business and adds a third year before the next maturity, and a company planning an acquisition could reasonably decide that is worth the difference. One expecting two quiet years probably would not. The comparison puts a price on the extra flexibility, and the business plan settles whether it is worth paying.
Getting outside help with a maturing facility
Kenward Partners advises companies on maturing loans and credit facilities. Often that means running a discreet market test with banks, private credit funds and specialty lenders while management continues its talks with the incumbent, so the board can weigh a real extension proposal against real alternatives. If you have a maturity coming up in the next year or two, we are glad to talk it through.
