Revolving Credit Facilities Amar Jandoo ajandoo@arlingclose.com

What is a Revolving Credit Facility?

A Revolving Credit Facility (RCF) is a form of pre-approved funding provided by a bank or another lender. Unlike a term loan which has a fixed repayment schedule, an RCF is much more flexible arrangement, for two keys reasons. Firstly, it allows the borrower the ability to draw down funds, repay, and then withdraw again, hence the term ‘revolving’. Secondly, the facility can be accessed at relatively short notice, of usually two to three days. Both of these factors make an RCF a key tool for liquidity for many organisations.     

The lender typically charges a variable rate of interest when the borrower withdraws funds; this is known as the ‘drawdown fee’. However, the privilege of flexibility also comes with a couple of extra (relatively low) costs attached: an ‘arrangement fee’ and a ‘non-utilisation fee’. A non-utilisation fee is payable on any undrawn amounts.  

Sometimes, the lender may choose to secure the loan on the borrower’s assets. Of course, under Section 13 of the Local Government Act 2003, a local authority cannot mortgage or charge any of its assets as security for its borrowings. However, if the local authority is acting as the lender, this provides an extra cushion of security on the investment.

How can local authorities use RCFs?

Local authorities can benefit from an arrangement such as an RCF as both a borrower and a lender.

Both private and public institutions utilise RCFs to fund working capital needs. The facility allows organisations to continue its operations seamlessly, without the worry of not being able to meet payments, such as salaries or the cost of goods and services.

As mentioned earlier, many organisations will have an RCF in place for times of need or as a lender of last resort, i.e. when cash inflows cannot meet cash outflows. However, with only a couple of days’ notice required, local authorities have historically had the Public Works Loans Board (PWLB) for this. For even more instant liquidity, local authorities are able to borrow from their peers. But with the PWLB consultation suggesting a lengthening in settlement terms, and a liquidity squeeze witnessed at year-end within the LA market, it may be time to consider a backup.

On the flip side, investors looking for further diversification and/or seeking a pick-up in return over traditional investments, can lend to corporates on an RCF structure. Arlingclose has helped facilitate a number of these transactions, with our local authority clients acting as lender to registered providers.

Why is now the right time to be thinking about having an RCF?

Given the uncertainty many local authorities face due to COVID-related spending, as well as delays in capital programmes, there is a lot of uncertainty regarding cash balances. Many authorities are seeing large fluctuations month on month, making it difficult to forecast future balances.

In light of negative interest rate speculation, authorities looking to protect their investment portfolios from the diminishing returns of traditional instruments like Money Markets Funds and bank deposits, could provide RCFs to other sectors. The flexibility to the borrower can result in more attractive rates for the lender.

Therefore, an RCF is a useful tool which can be utilised by authorities whether in a net borrowing or a net investing position.