Reed joins scramble to secure long-term finance via ‘forward start’ deals

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The Independent Online

Indebted companies worried about refinancing loans are increasingly turning to deals known as “forward start” facilities, which allow them to secure long-term debt without the banks having to pay new money up front.

The Anglo-Dutch publishing group Reed Elsevier yesterday signed a new $2bn (£1.4bn) deal, which extends its debt, originally due to expire in May 2010, to May 2012. Unlike most refinancing deals, forward start facilities do not replace the existing loan, which stays in place, but instead lies dormant until the current deal matures.

The deals are advantageous to companies, allowing them to secure long-term funding at a known price, and to banks, which are usually able to extract bigger fees from clients. Unlike plain refinancing, forward starts typically allow companies to secure funding long before existing deals end.

As well as Reed, the pubs group Marston’s has signed a forward start deal in recent weeks. The bookmaker William Hill is also said to be in negotiations with its bankers. A spokesman for Reed Elsevier yesterday said the group was attracted to the idea of locking in longer-term funding, which was on similar terms to its existing loan.

Some corporate lenders have been critical of forward starts, saying that some are risky long-term bets that allow companies to secure financing at below market price, and without any incentive to bring down overall debt levels.

Some deals for non-UK companies have been agreed as much as three or four years in advance, taking little account of how market conditions might change. Royal Bank of Scotland, which is now 70 per cent owned by the taxpayer, and Barclays Capital, the investment banking arm of Barclays Bank, arranged the deal for Reed.

“Some banks are marketing forward starts aggressively, and the banks are allowing the deals through because these tend to be huge, well-rated clients. The deals are not being done at market levels and there seems to have been little discussion with the regulators about how these deals are accounted for,” one loans banker, on condition on anonymity, said. The FSA refused to say if it had been contacted by banks about forward start deals. RBS and Barclays Capital declined to comment.

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