What is a pricing grid?

Grid-based pricing determines loan pricing based either on the credit rating, the leverage ratio or any other agreed upon metric of the borrower.  A margin grid is a matrix used to adjust the margin (price) of a term loan or revolving credit facility and, where applicable, a commitment fee during the term of facilities usually based on a credit rating of the borrower and/or a specific financial ratio, commonly net-debt to EBITDA ratio.

For example, if the issuer’s debt to EBITDA is less than 3x, pricing is Euribor + 275; if such ratio decreases to 2.5x, pricing is Euribor + 250.

– Standard & Poor's, 2013

Leveraged facilities agreements commonly use a margin ratchet linked to one or more of debt, interest and cash flow coverage.  Step-up pricing, which increases the margin over time and reduces interest expense in the early years of the financing, is a common feature of project financing.

The higher a lender’s quality, the lower the cost of funds it can lend.  Participants (small banks, institutions, CDOs, hedge funds) earn only a margin over their cost of funds and do not receive any of the underwriting spread or closing fee.