Bloomberg is
reporting
that Citigroup Inc., Credit Suisse Group and other banks are starting to shift away from basing the rates of $6 trillion in revolving loans
solely on a combination of the borrower's debt rating and a mark-up to
LIBOR.
Tying the lines to swaps could leave corporate borrowers in the lurch
since the derivatives are often used by speculators to bet on a default
by those who don't actually hold the company's debt and aren't listed
on any government-regulated exchanges. The possible scenario could be a
company that runs into trouble sees its borrowing costs skyrocket at
the worst possible time. As the costs of protection against a
default soar and take with it the company's interest rate, the end result
could easily be a default that could have been avoided.
Among the companies that have had their credit lines linked to default
swaps are food maker Nestle SA, cell-phone maker Nokia Oyj and electric
company FirstEnergy Corp. -
George White
See Bloomberg story