Three reasons that justify refinancing
The first reason is pricing. If market rates or the company's credit standing have shifted since the loan was drawn, new financing may deliver a lower total cost of capital even after arrangement fees.
The second is structural. A company that has outgrown its original covenants may need a package that leaves room for investment, M&A or dividends. The third is tenor — an approaching maturity should be addressed at least 12 months ahead to avoid refinancing risk.
Make the numbers add up
A serious analysis compares the present value of future interest under the existing and new agreement, adjusted for arrangement fees, break fees and any security-related costs. A payback below 18 months is normally a clear indication that refinancing is justified.
Don't overlook the non-monetary effects: simpler reporting, fewer covenants, a single lender instead of several, or the ability to release pledged assets.
Timing and market windows
Market windows open and close. A prepared company — with an updated information memorandum, a current financial model and dialogue with two or three banks — can act in a couple of weeks. A company that starts the process only when maturity approaches gets worse terms.
- Refinancing should be justified by price, structure or tenor — ideally all three.
- A present-value calculation provides an objective basis for the decision.
- Start the process at least 12 months before maturity.
- Preparation is what allows you to act on market windows.
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