Evergreen Facility: How Automatic Renewal Works

Every facility with a fixed end date creates a refinancing event: new credit approval, new documents, new conditions, and a borrower who has no funding if any of them fails. For a sound business whose needs barely change, that is cost without much information. An evergreen clause removes the event. The facility continues on its terms until someone ends it, and the bank's ordinary annual review becomes the place where it decides whether to carry on.

Two shapes are common. In the first, a facility with a one-year term renews for another year at each anniversary unless notice is given. In the second, a longer facility, say three years, has its maturity extended by a year at each anniversary, so the remaining term returns to three years; once notice is given, the extensions stop and the facility runs to whatever maturity it then has. Both are different from an extension option, under which the borrower must ask each year and the lenders must say yes. An evergreen needs a no to stop it; an extension option needs a yes to continue.

Either party can usually give notice, and the bank usually needs no reason and no default to do so. That is the defining feature. A notice of non-renewal is not an accusation, does not accelerate anything already drawn, and does not by itself change the price; it fixes an end date. The drafting points are the length of the notice period, how notice must be given, and whether the clause provides clearly for repeated renewals rather than a single one. A borrower relying on the facility for years reads that wording first.

A commercial printer, constructed for this page, has a US$15m revolving facility. Its anniversary is 30 June, and either party may stop the renewal by notice no later than 31 March. On 30 June last year (year 0), with no notice given, the maturity moved out to 30 June three years later (year 3). This year the bank's review, in February, finds that two large publishing contracts have ended, earnings have fallen by a third and the facility is drawn close to its limit. The bank gives notice on 20 March (year 1).

What that notice means depends on which shape the printer signed:

The same notice, on the same day, gives the printer more than two years in one case and one quarter in the other. Under the rolling version the bank has, in effect, been holding a three-year commitment every day of the facility's life, and it approves and prices the facility on that basis. Under the one-year version it has held a one-year commitment, and the printer has the harder problem.

Had the bank's review slipped to April, past the deadline, the facility would have renewed regardless, and the bank would have carried one more year of commitment to a business it had already decided to leave.

The words sound alike, and the concepts sit at opposite ends of a credit file. An evergreen facility is a structure agreed at the start, usually for a borrower whose need is steady and whose credit is sound, with a clear way for either side to end it. Evergreening is a behaviour that appears when credit has weakened: renewing, rolling or topping up a loan so the borrower can keep paying with the bank's own money, which postpones recognising a problem rather than solving it.

The two can meet. An evergreen facility that is left to renew for a borrower the review has flagged, because giving notice would force a difficult conversation, is being used to evergreen. The structure is innocent; the decision not to act is what matters. A renewal a bank agrees knowingly for a borrower in financial difficulty, on terms it would not otherwise give, is a concession that banks' credit rules commonly record and monitor as forbearance or restructuring. A renewal by silence was decided by no one, so nothing records it.

DEFINED IN ONE PARAGRAPH → · EVERGREENING → · MATURITY EXTENSION →

For the bank, the file turns on its calendar. The annual review has to be scheduled so that a decision is made before the notice deadline, and the credit paper records the deadline, not only the anniversary. A rolling evergreen is read as a commitment of its full rolling term, because that is the notice the bank has given itself. A bank that wants a shorter exit negotiates the shape and the notice period at the outset.

For the borrower, the notice deadline belongs in the treasury calendar beside the covenant test dates. A longer notice period, or the rolling shape, is worth negotiating when the facility is set up, because it decides how long the business has to replace the money if the bank leaves. When notice does arrive, the work is the same as for any maturity, with the clock already running.

THE SIX MONTHS BEFORE YOUR LOAN MATURES → · PRODUCT FILE: REVOLVING CREDIT FACILITY → · REFINANCING AND SWITCHING BANKS →