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— Follow the Money —
DiPietro was referring specifically to the revolving credit line, one of the most widely used -- and one of the most disliked -- liquidity tools on corporate balance sheets. Disliked, that is, by bankers, who have been taking advantage of the credit crunch to revise terms of the instruments. Take a recent credit amendment by Limited Brands Inc., the parent of specialty retailers Victoria's Secret Stores LLC and Bath & Body Works Inc. On Feb. 26, the company amended a $1.75 billion debt package, successfully negotiating with lenders J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. to insert more flexibility into loan covenants by increasing the amount of leverage the company can put on its books. The price it paid: adding security to unsecured loans and eliminating $300 million of revolving credit, according to Standard & Poor's Leveraged Commentary & Data unit.
Market sources say that the trend will likely continue as banks look to either eliminate the revolvers entirely or scale them back based on the little value relative to risk that the instruments bring to bank capital. "Bankers hate revolvers," says one capital markets participant. "They're essentially a cheap option in the hands of a borrower, but banks have to reserve capital against them and then be prepared to fund them within 24 hours." Revolving credit lines function as credit cards for corporations, which can tap them on short notice to meet short-term liquidity needs. This happened on Feb. 27, when casino operator MGM Mirage borrowed $842 million from its revolver, citing "the uncertain state of the global economy." As one debt markets participant says, revolvers for the past 20 years afforded companies cheap access to liquidity, costing an average of 50 basis points on unused capacity while burdening banks with the full capital hit, as if the loan had been committed. This is only true for multiyear revolvers; the capital rules don't apply to commitments that mature in less than a year, which explains the use of the 364-day revolver that has to be refinanced annually. In leveraged finance deals, most revolvers of recent vintage are multiyear because strongly positioned borrowers were able during the credit boom to negotiate the best possible terms. Banks were willing to take this trade on the theory it gave them access to other financing and advisory business. "But nobody is doing anything right now," a banker says. "Banks have no need for a ticket to entry." In fact, banks are using any wedge to gain leverage, forcing companies both to reduce revolver commitments and their overall debt load, thereby reducing bank exposure. This happened to electronics company Technitrol Inc., which approached lenders in February to amend its covenants. The banks, led by J.P. Morgan, agreed to let it increase its debt in the short term, but only if it cut a $300 million revolver to $175 million, and laid out a plan to reduce debt. Technitrol hired Morgan Stanley to explore strategic alternatives for its AMI Doduco Inc. subsidiary to raise cash and pay down debt. So where does all this leave companies? The loss, or reduction, of a revolver is akin to an individual losing a credit card. It forces them to scale back plans to available cash flow, which will limit a company's options. According to one banker, banks' hard line on revolvers could stifle some struggling companies in a tough economic environment. "This is worse than forcing companies to go cold turkey," he says. "It's a death sentence." According to Thomson Reuters Loan Pricing Corp., some $636.34 billion of revolving credit is set to mature by the end of 2010, with a further $568.49 billion set to mature in 2011 alone. That sets up a potentially difficult readjustment for companies that have become used to living on their credit cards. It also likely means lower growth rates in the future. "It's a fundamental shift," says DiPietro. Comments |
"This is a time to obsess about liquidity," says Janice DiPietro, managing partner at Tatum LLC, a consulting firm that advises chief financial officers. "We're advising our clients that if you're going to refinance debt, you have to understand that those options may not even be available to you. And if they are, they'll be at a higher cost."
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And how does this help the economy? Is it not the government's plan to pump cash into these banking institutions therefore allowing these banks to start lending again. If you are taking away the companies credit card, essentially eliminating these funds - what are the banks then doing with these funds? And, by forcing companies to go cold turkey (which is not a bad thing is some instances), won't this hamper their ability to conduct business and therefore be forced to layoff, reduce production, and/or close their doors. Why is this last problem not being addressed, and why is it that the financial institutions seem to be coming out ahead when the mess originated from them in the first place?