Have you ever heard of an Agency credit facility? Even if you are familiar with this term, do you know exactly how it works? We understand that corporate jargon may cause some confusion. This is why Hunt Mortgage Group has prepared a quick and easy guide to understanding everything you need to know about a credit facility.
A credit facility is a type of loan or debt strategy that is often used in a business or corporate setting. To put it simply, a credit facility is a variety of different loans that a company can bring on, to meet its financing needs. An agency credit facility is more or less a large umbrella loan that a company can draw down when needed over an extended period of time; this concept is akin to a bank secured revolving line of credit.
A credit facility is often secured by a group of multifamily properties, each of which has common ownership. Many companies choose to use this service because credit facilities are helpful and reliable tools for managing a portfolio of assets. These facilities also provide flexible financing options which are attractive to large scale Borrowers.
How does it work?
First, the borrower establishes a credit facility by offering an initial property or group of properties as collateral. It is important to keep in mind that these properties have the potential to be sold or substituted in the future. The borrower may use the cash to recapitalize other assets. The borrower also has the option to free up cash for additional acquisitions as well.
Next, the credit facility’s terms and agreements are documented. This credit facility agreement highlights and explains the individual mortgage loans and establishes the cross-collateralization. As a borrower, it is important to note that the key lending benchmarks are a combination of the overall pool leverage and the debt service coverage. This means that stronger performing properties have the potential to support weaker performing properties and traditional assets.
What are the key benefits?
Many Borrowers choose to establish some type of credit facility because of the many advantages this strategy offers. In addition to creating a backup source of revenue for various projects, here are several important reasons that businesses choose to use a credit facility:
- There is a lot of flexibility towards deciding when and how capital can be deployed.
- There is access and speed to funding when needed which is especially important in a highly competitive acquisition market.
- Related to the previous point, there is a streamlined and efficient underwriting process for standardized loan documents.
- The presence of full-term interest-only is a standard feature.
- The borrower has the ability to ladder debt maturities.
- The borrower has the option to mix fixed rate and floating rate debt.
- There is a low cost of capital due to the pooled nature of the collateral.
- There is no minimum occupancy requirement for individual assets.
- The Borrower has ability to substitute properties in the collateral pool, along with expansion and borrow up features.