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| Tuesday, February 9, 2010 |
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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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October 26, 2008 12:01 AM ET
Uncertainty in the financial markets has prompted a slew of companies to tap into their revolving credit lines, putting further pressure on the teetering financial industry. Last week, eBay and Tribune joined the growing list of well over a dozen businesses that have drawn down some or all of their revolvers in the last two months. In response, banks have been seeking to tighten revolving credit lines and unload them, along with the rest of their loan portfolios, in the secondary markets. Both options have restrictions though, as a lender is legally obligated to honor a revolver as long as the borrower is in compliance with the loan agreement. Banks are also having problems selling revolvers because such loans aren’t attractive to investors. Companies typically treat revolvers as rainy-day funds to be drawn on in a pinch. They also use them to meet short-term capital needs. Banks have extended them at low interest rates in recent years, as they assumed that few clients would ever tap them. But a confluence of factors has spiked a run on revolvers. The market for commercial paper has been reeling since Lehman Brothers went bankrupt, cutting off another source of short-term financing. The battered corporate bond market has also been unforgiving to new issuances, as illustrated by the high yields on recent offerings from IBM and beverage company Diageo. Most borrowers say they want to shore up cash in the face of tough times, but there are also worries that financing might not be available should more banks go the way of Washington Mutual and Lehman Brothers. Domino’s Pizza, the Spanish Broadcasting System, Ford Motor and Accuride all had credit lines through Lehman Brothers that were thrown into uncertainty when the investment bank filed for bankruptcy. At this point, it’s anyone’s guess what will happen to Lehman’s commitments. Companies may also be drawing on revolvers for fear their declining financial performance could prompt lenders to cut off their financing should they breach a covenant or default on a loan. Tapping a revolver now may “pre-empt any technical challenges” to a company’s access to its loans, Fitch Ratings said in a recent report. Fitch said it has seen “numerous examples” of banks scaling back revolvers after a company breaches a covenant or refinances a loan. Restaurant operator Perkins & Marie Callender had its senior revolver cut to $26 million from $40 million in a recent refinancing. Said Fitch: “This trend is expected to accelerate.” While tapping a revolver tends to carry a stigma, the markets seem to be forgiving of General Motors, American Airlines, Lear and the numerous other corporations that have recently accessed them, according to Daniel Gates, chief credit officer with Moody’s Investors Service. “It can be perceived as a sign of weakness to draw your revolvers,” Mr. Gates said. “In a market like [today’s] I think some of that stigma is diminished.” It isn’t unusual for companies to draw on revolving credit in times of uncertainty. Northwest and Southwest Airlines drew on their revolvers following the 2001 terrorist attacks, which rocked the airline industry. At least one lender—Citigroup—has been bracing for the trend. The bank’s chief financial officer, Gary Crittenden, said in an earnings conference call earlier this month that the firm began taking a harder look at its corporate loan portfolio about a year ago, tightening and cutting credit lines as accounts came up for renewal. “In some cases, we size them down,” Mr. Crittenden said. “In some cases we eliminate them altogether.” He said this was evidenced in the 15% decline in its corporate loan portfolio in the third quarter. The portfolio grew by 27% during last year’s third quarter. “We’re obviously into a period now of economic weakness, and we’ve seen accounts begin to draw down their credit lines,” Mr. Crittenden said. “At this point, there’s nothing out of pattern with those draw-downs that we haven’t seen in prior recessions. And we clearly have thought very carefully about the liquidity implications of this.” Citigroup acted as administrative agent for one of the larger revolver drawdowns: General Motors’ tapping of the remaining $3.4 billion of its $4.5 billion revolver in September. Industry experts say the rush to tap revolvers is another stress on the already wilting financial industry, prompting some to explore selling their revolvers on the secondary market. GMAC, for instance, flirted with unloading a $2.7 billion portfolio that had positions in revolvers held by Rite Aid and Toys R Us, among others. GMAC, which was selling the investments as part of an effort to shed underperforming, non-core assets, pulled it off the market earlier this month, though, citing unfavorable market conditions. That illustrated the problems some banks have in shedding a loan portfolio stocked with revolvers. They are an unattractive asset, even though sellers are willing to offer them at a discount, according to Ken Gacevich, a managing director at Babson Capital. That’s because the holder of a revolver has to keep capital in reserve to make good on the credit facility. That’s non-performing capital that most investors would rather not have on their balance sheet, he said. When shopping a portfolio of revolvers, lenders typically include it in a larger package along with term loans or other credit facilities. But even then, they are sometimes out of luck. “They will often get stuck holding the revolver because no one wants to buy it, because of the unfunded asset problem,” Mr. Gacevich said.—Additional reporting by Hilary Johnston
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