Where only upfront fees are earned by syndicate participants (underwriters/sub-underwriters and participant lenders), borrowers can incur numerous other fees, depending on the nature of the financing. These include the fees paid to lenders, agents and security trustees for services provided in making financing available, as compensation for the responsibility they take in the loan process and the additional work they perform.
A commitment fee is a per annum fee set as a spread over an interbank rate paid by borrowers to lenders on the undrawn (unused) portion of a credit facility on a pro rata basis after the closing, typically quarterly in arrears. In a term loan, a commitment fee in the form of a ticking fee will cease when the availability period ends – often not charged for a short availability periods.
Because HKTP did not need significant construction funds until after the land reclamation was done, it had the option of waiting until 2002 before raising the bank debt. By waiting, it would save on the commitment fees charged by the banks.
A commitment fee is charged largely as compensation to lenders for the cost of regulatory capital that needs to set aside against their unutilized commitment. When commitment fees are payable for the relevant facility is subject to negotiation and agreement, either from the start of the availability period or the earlier of the facility closing date.
Banks usually price the good quality of borrowers with lines of credit plus relatively large spread and fees on drawn amounts and relatively low fees on undrawn amounts.