Structuring the Most Favorable Bank Loans

The rebounding economy and competition among banks are placing borrowers squarely in the driver's seat in negotiating loans' pricing and terms.

There's nothing unusual about a bank extending a $600 million credit facility to a multibillion-dollar company. Unless that company happens to be a home builder. Because land-development projects can take years to generate a positive cash flow, banks are cautious about extending credit for them. So it was surprising when, in January, Miami-based Lennar Corp. and LNR Property Corp. acquired Newhall Land and Farming Co. for $1 billion, a deal paid for by what Lennar's vice president and treasurer, Waynewright Malcolm, calls "the largest syndicated land loan done to date." Arranged by Bank One and Deutsche Bank, the debt component included a $400 million term loan and a $200 million revolving line of credit.

According to Courtenay Wood, managing director of loan syndication for Banc One Capital Markets in Chicago, the Lennar/LNR transaction marked the first time that a land-development loan was sold in the institutional market. Yet competition for the deal was so intense -- commitments were nearly three times the transaction size -- that Bank One and Deutsche Bank reduced the pricing on the term loan by 25 basis points (bps). The term of the revolver, typically three years in a land deal, was set at four.

This unprecedented transaction reflects recent shifts in the bank-loan market, where lenders are beginning to loosen credit standards, relax covenants, accept longer maturities and reduce interest rates. Plenty of money is available, and banks are eager to lend it.