An amend and extend split into the extended tranche and the stub, with the fee and margin uplift taken out of the same cash, and the refusal rate at which it fails.
An amend and extend pushes out the maturity of a loan only for the lenders who consent, usually in exchange for an extension fee and a higher margin. Those who refuse keep their original maturity, so the borrower must repay them first, out of cash or new debt. On an illustrative €300m loan with two years to run, 30 per cent of lenders refusing leaves a €90.0m stub against €42.75m of available cash: a gap of €47.25m. The extension stops working above 13.85 per cent of lenders saying no.
Worked in full in How to Read a Credit Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Extending maturity is a change that, in most leveraged loan agreements, needs the consent of each lender whose loan is extended rather than a majority vote. That is the mechanical reason an amend and extend creates two tranches: an extended one that has agreed, and a non-extended one that has not and cannot be made to. The question the borrower has to answer before sending the request is how many refusals it can absorb.
| Input | Value |
|---|---|
| Term loan outstanding, bullet at maturity | 300.0 |
| Current all-in rate | 7.0% |
| Years to original maturity | 2 |
| Extension: margin uplift / fee on the extended amount | 75 bp / 1.0% |
| Cash today | 25.0 |
| Cash flow before interest, per year | 40.0 |
| Minimum operating cash | 15.0 |
| Share of lenders refusing to extend | 30% |
Step 1: split the loan. 70 per cent of 300.0 extends: 210.0. The other 90.0 is the stub, still due at the original maturity in two years.
Step 2: the cost of buying the extension. The extending lenders get a fee of 1.0% × 210.0 = 2.10 at signing and 75 basis points more margin, 7.75 per cent instead of 7.0. Annual interest becomes 210.0 × 7.75% + 90.0 × 7.0% = 22.58. Before the original maturity arrives the extension has cost the company 2.10 of fee plus 3.15 of extra margin: 5.25 of cash that would otherwise have gone towards the stub.
Step 3: the cash at the original maturity.
Available = cash today + cash flow × years − interest × years − extension fee − minimum cash
= 25.0 + 80.0 − 45.15 − 2.10 − 15.0 = 42.75
Gap = stub − available = 90.0 − 42.75 = 47.25
The cash covers 47.5 per cent of the stub. The rest has to come from the revolver, an incremental facility, an equity injection or a sale, and all of those must be in place before the stub falls due. If they are not, the stub becomes a payment default, and because both tranches sit in the same agreement, that event of default lets the extended tranche be accelerated too: the lenders who said yes are then in default as well.
Every refusal moves money from the extended tranche to the stub. It also slightly lowers the cost of the extension, since fewer lenders earn the fee and the uplift, so available cash rises by 7.50 for each 100 per cent of refusals. The two lines cross where
Available(r) = 40.50 + 7.50 × r = 300.0 × r = stub(r)
r* = 40.50 ÷ (300.0 − 7.50) = 13.85%
In Excel, with available cash at 0% and 100% refusal in B1 and B2: =B1/(Loan-(B2-B1))
| Refusing | Extended | Stub | Extension fee | Cash available | Gap |
|---|---|---|---|---|---|
| 0% | 300.00 | 0.00 | 3.00 | 40.50 | 0.00 |
| 10% | 270.00 | 30.00 | 2.70 | 41.25 | 0.00 |
| 13.85% | 258.46 | 41.54 | 2.58 | 41.54 | 0.00 |
| 20% | 240.00 | 60.00 | 2.40 | 42.00 | 18.00 |
| 30% | 210.00 | 90.00 | 2.10 | 42.75 | 47.25 |
| 40% | 180.00 | 120.00 | 1.80 | 43.50 | 76.50 |
Below 13.85 per cent the borrower can pay the stub out of its own cash and the extension has done its job. Above it, the borrower has swapped one maturity problem of 300.0 for a smaller one that arrives on the same date, plus a more expensive loan. The number can be computed before the request goes out, and it should be: it tells the borrower how much backstop financing to line up, or how large a fee to offer to keep refusals under the threshold.
Who gets repaid first. The refusing lenders are paid out in full at the original maturity while the extending lenders wait two more years. If the borrower weakens in between, the lenders who were accommodating end up bearing more of the risk than the ones who were not, which is why extending lenders often negotiate a condition that the stub be refinanced, or a springing maturity that brings their own loan forward if it is not.
Per 100 extended, the lender earns a fee of 1.00 and an uplift of 0.75 a year. Over the two remaining years and two years of extension that is 4.00, undiscounted, paid for taking two more years of a credit that needed an extension. Whether that is adequate is a pricing question; whether the extension survives the refusals is an arithmetic one, and the second has to be answered first.
The common mistake is to treat the consent level as the hurdle, as if 70 per cent agreement meant the extension succeeded. Consent is lender by lender, and every lender who refuses is a creditor the borrower must repay in cash on the old date. The second mistake is to forget that the fee and the higher margin are paid out of the same cash the stub needs: at no refusals at all, available cash is 40.50, not the 48.0 the borrower would have had without extending.
Split the loan into extended and stub, deduct the fee and uplift from the cash path, and compare the cash available at the original maturity with the stub. The refusal rate at which they meet, 13.85 per cent here, is the number to know before launching the request. The extension case worked on a seven-year unitranche, with the stub and the cash it competes for, is one of the three cases on the companion page for this book; for debt that can be raised alongside, see how to calculate incremental facility capacity.
In most leveraged loan agreements, no: extending a lender's maturity needs that lender's own consent, so refusing lenders keep the original date. In the illustrative case 30 per cent refuse and their 90.0 of a 300.0 loan stays due in two years, while the other 210.0 extends.
Typically an extension fee and a higher margin. Illustratively, a 1.0 per cent fee and 75 basis points of uplift give an extending lender 4.00 per 100, undiscounted, over the two remaining years and two years of extension. The borrower pays 2.10 of fee and 3.15 of extra margin before the original maturity.
As many as the borrower's cash and backstop financing can repay at the original maturity. Here available cash rises from 40.50 at no refusals by 7.50 per 100 per cent refusing, while the stub rises by 300.0, so the two meet at 13.85 per cent. At 30 per cent the gap is 47.25.
The lender who does not extend is the third case on the companion page, built on chapter 25 of How to Read a Credit Agreement. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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