Because banks receive favorable capital treatment when a credit facility’s tenor is shorter than one year, lenders increasingly offer financing with 364-day tenors and uncommitted extension option terms of up to 364 days. In this Legal Update, we explain the potential impact associated with extending a 364-day credit facility tenor prior to the stated maturity date then in effect for an additional 364 days, discuss potential Basel III Endgame implications, and offer solutions to mitigate these implications.

Background

Banks have traditionally received favorable capital treatment when a credit facility’s tenor is shorter than one year. Accordingly, lenders increasingly offer 364-day facilities, with uncommitted extension options of terms up to 364 days. In practice, lenders often would like to effectuate these uncommitted extension options prior to the current stated maturity dates without realizing the impact. This practice has certain implications, however, and new federal banking regulations may negate this impact all together.

What Lenders Should Consider Before Extending 364-Day Credit Facilities

Implications of Early Extensions

If the term of a facility is extended for an additional 364 days, and the extension takes effect prior to the original stated maturity date, this could be viewed as a committed tenor in excess of a year. Because borrowers typically request extensions 30 days or more in advance of a credit facility’s maturity date, lenders and borrowers often would like to effectuate the extension before the facility’s original maturity date to mitigate refinancing risk or operational risks; however, the lender may be subject to additional capital requirements because the tenor is longer than one year.

Risk Mitigation Steps for Lenders and Credit Facility Participants

First, credit facility participants could wait until the current stated maturity date before making an extension effective. While this option has its own risks, such as a delayed closing of the...