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To refi, or not to Refi?

The timing and rationale for refinancing (refi), is often on CEOs, CFOs and treasurers’ minds.



Among my clients, there are two particular corporations that sit at the extreme opposite ends of attitudes towards refinancing. Both are privately owned businesses and have long-standing relationships with their banks. They are mid-size companies with a turnover in the range of $100m-150m, but with slightly different business profiles. Interestingly, the one, that I felt ought to consider refinancing, is opposed religiously to the idea, whilst the other one, that I felt should not refinance, threatens to refinance whenever his relationship bank seeks to reviews its facilities.


The decision on whether to refinance really depends on the individual company’s situation. Here is a framework for your consideration:


  1. Event triggers – First and foremost the factor to consider is whether there is an event triggering the need to refinance. The event triggers can be broadly categorised into two types: external and internal. External is very straightforward: you are asked by your banks to seek financing elsewhere. In this case, refinancing is being forced upon you and you have little discretion but to refinance. Try not to get yourself into this situation. The other type is internal, which is purely driven by strategic directions such as, an acquisition or expansion, which requires an increase in facility amount. In the absence of a pressing event trigger, the decision for refinancing is even more strategic.

  2. Cost savings – The next most important and logical consideration is whether you would achieve financial benefits out of refinancing. There must be a clear monetary cost advantage to refinance, especially with another financial institution and your business is situated in NSW. The abolition of mortgage stamp duty has been promised forever but has been pushed back year after year. That duty amounts to 0.4% of every secured facility. Immediately, the refinancing package needs to have at the minimum of 0.4% savings (in the absence of any other intangible benefits) for you to consider the merit of refinancing.

  3. Low interest rate environment – This is not a strong enough reason to refinance. In the wholesale banking market, your debt facility would have been priced as base rate (usually BBSY) plus a risk margin. The base rate follows the market and hence you will automatically enjoy approximately the same interest rate cut. To lengthen the benefits of lower interest rate, you can simply enter into interest rate swap without refinancing. The focus should be on risk margin, a far more important variable, which is a function of your company’s risk profile which leads me to my next point.

  4. Risk profile – Over the business life cycle, there are many inflection points where businesses may experience strengthening of business profile such as an increased pool of more diversified cash flow or more mature production line. These in turn improve your credit risk profile and hence warrant a finer risk margin. On the other hand, the business may also experience an increase in risk profile as it embarks on a greenfield project. In this case, the change of business profile may require a different form of financing to quarantine the greenfield risk from the core business. Refinancing could be a means to establish two different facilities to do just that.

  5. Intangible determinants – Other than monetary benefits, businesses need to consider whether refinancing may bring intangible benefits such as more favourable terms and conditions and the impact it may give to your business’s overall competitive advantages. By the same token, we need to ensure refinancing will not post disadvantages. Take facility maturity as an example. Would you consider refinancing your $100 million five-year facility with an annual review facility because the annual review facility provides you with a 1% interest rate saving? Sure, $1m is an significant interest cost saving. But, what if your business is accommodation – a large portfolio of hotel assets? They are long term assets which make you want to reconsider the costs and benefits of this refi. But, what if you are an import/export business with an inventory turn of 90 days? Would this annual review facility be a better funding match? Maturity is one of many intangible determinants that corporations need to assess in structuring facilities. Others include security and covenant packages. These intangible determinants affect your business’s competitive advantage.

  6. Corporate restructure – Akin to a change of risk profile, corporate restructuring often triggers a need to consolidate debt facilities. Many companies, as they grow over time, establish numerous stand-alone facilities. Whilst the business profile has not altered materially, consolidating debt facilities as a result of corporate restructuring sometimes may provide potential economies-of-scale benefits. The reverse option, debt de-consolidation can also be considered in refinancing.

  7. Recapitalisation – Consider this as a derivation of refinancing to be considered when opportunities exist to increase shareholder value by recapitalising the company. These opportunities include debt-funded special dividends or share buyback, re-adjusting capital structure to create a more efficient and active balance sheet or leveraging your company to defend potential takeover bids.

  8. Managing relationship banks – Lastly, refinancing, if used effectively, can be served as a tool to manage your relationship banks. Do you feel your current bank is supportive of your business and future endeavours? Does it have the risk appetite to continue to debt fund your growth? Also, does it have the appropriate products, services and geographic representation to service your increasing needs? Is it strategically wise to introduce primary and secondary banks into your relationship bank group via refinancing?

Back to my two clients. The one who opposes refinancing actually could potentially gain a lot of benefits just by consolidating his multiple facilities in return for a release of personal guarantee, better alignment of facility duration with his property holdings and a more competitive risk margin. On the other hand, the client that threatens refinancing every other day should focus on building a better relationship with his current bank. The credit profile of his business is still unstable: the manufacturing line is in expansion mode, but the rate of utilisation is under 80% and cash flow is neither strong nor weak. All other banks would voice the same concern. There are no clear advantages to refinance.


The decision to refinance should not be taken lightly. There are many ways to achieve funding efficiency. Refinancing is only one of many.

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