Tips for Repricing Commercial Credit Deals

By Evan Sparks

About 57 percent of banks’ commercial credit renewals for terms of three years or longer are being rolled over at existing prices rather than being repriced, according to survey research released today by PrecisionLender. The share of repriced deals is smaller for shorter maturities. Meanwhile, just over half of the largest deals — valued at $25 million and up — are being repriced.

What’s more, notes PrecisionLender SVP Gita Thollesson, many deals are rolled over at existing pricing even when the credit becomes riskier. “About three-quarters of downgrades were rolled over at existing pricing levels,” she says. “Quite often, when renewal spreads are changed, often they’re moved in the opposite direction of risk migration.”

Indeed, for credits on which risk ratings remain unchanged, many lenders are reducing spreads — 21 percent for deals of less than $5 million and 35 percent for deals valued at over $5 million, according to the survey. “Pricing has eroded in the market,” Thollesson says. “Customer retention is the main issue.”

The choice of index also has something to do with repricing trends. Just 23 percent of prime-based loans were repriced, while 49 percent of Libor-based credits were. This was driven by a preponderance of auto-renewals on smaller prime-based deals and a greater focus on larger deals, which tend to be priced in Libor. Thollesson notes a “higher incidence of performance-based pricing on the larger deals,” adding that “it’s those smaller business banking credits that tend not to get repriced too often.”

Tips for a repricing conversation

Proposing performance-based pricing is one tip that relationship managers use to renew at risk-appropriate rates. Other tips Thollesson recommended include explaining the repricing rationale, including changes to the borrower’s financial performance, and making modest pricing adjustments.

“The banks that had the most success in repricing their downgrades upward actually had very modest increases,” she explains. “The banks that didn’t have much success were asking for more than a point. Whenever the increase was 25 basis points or less, the borrower accepted the pricing adjustment or negotiated the rate down.” Using non-standard pricing increments — say, 18 basis points instead of 25 — can show precision and the science behind pricing rather than seeming like an arbitrary percentage, she adds.

Thollesson advises bankers to start conversations early. “Often when a relationship manager waits till the last minute, they have no choice but to roll the deal over at existing pricing,” she says. And she encourages bankers to place the repricing and the overall deal in context, emphasizing the quality of the offer even if the price is high and explaining how relationship pricing works. “Put the borrower in the driver seat,” she suggests — if a deal’s pricing was based on the borrower bringing additional business to the bank, but that didn’t materialize, a relationship manager can explain that the borrower can choose to move that ancillary business or be repriced into a higher rate.

 

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About Author

Evan Sparks

Evan Sparks is editor-in-chief of the ABA Banking Journal and vice president for publications at the American Bankers Association.