Corporate finance chiefs who are concerned about their companies’ loan maturities looming over them increasingly are turning to “amend and extend” arrangements. Year to date, about $40 billion in amend-and-extends have been issued, says Ioana Barza, vice president and senior market analyst with Thomson Reuters LPC. Overall, amendments to existing loans account for about 80 percent of leveraged lending activity, she adds.

While no two amend-and-extends have had the same structure, they generally work like this, Barza notes: Say a firm has a $60 million loan maturing in 2010. It might first pay down $10 million to demonstrate its financial stability and reduce the amount of the overall loan outstanding. Then, the company might keep about $20 million in the original agreement and try to place the remaining $30 million in a new revolver that matures in 2012. To sweeten the deal and entice lenders to the new loan, the extended portion typically carries a higher rate.

These deals give firms some breathing room, while allowing them to keep their current loan groups in place. That’s been critical recently, as many CFOs and treasurers are looking at loans coming due in the next year or so and worry that the credit markets will remain less than hospitable. “So, they’re doing a pseudo-refinancing approach to get relief from upcoming maturities,” Barza says.

While an amend-and-extend may let treasurers breath a little easier, the relief comes at a price. Of course, there’s the higher rate on the extended portion, as well as an amendment fee. In addition, the company now has to manage what are essentially two lender groups. All the parties involved need to address issues like prepayment. The company, not surprisingly, would prefer to prepay the extended loan, since it has the higher price tag. However, few of those lenders are going to go along with that plan. Often, the solution is to allocate any prepayments proportionately between the two loans, Barza says.

Lenders also have some concerns. While they may like the higher spread on the extended loan, the extension also means they’re linked to the borrower for another year or two. The lenders need to be confident that the company can survive, even after it repays the first tranche.

While amend-and-extends have taken off in the U.S., corporate borrowers in Europe, where documentation requirements are stricter, have begun using what are known as “forward starts.” Essentially, the companies offer their current bankers a loyalty fee in exchange for their commitment to refinance at a set rate when the current loan comes due. Forward starts have accounted for 14 percent of the approximately $443 billion in investment grade lending activity in Europe so far this year, Barza says.

The surge in these new loan products reflects a couple of factors. One is the sheer volume of corporate loans coming due, particularly in 2012. According to Thomson Reuters, the “refinancing cliff” jumps from about $585 to $975 billion between 2010 and 2012. The other is the uncertainty of the credit landscape. “Companies are focused on reducing their reliance on short-term debt, because they don’t know their ability to refinance,” Barza says. ###