To Lend and Lend Not

Corporate borrowers are finding that an investment-grade credit rating makes a big difference.

Lead banker Bear, Stearns & Co. got busy massaging the terms, employing a discount as well as a Libor floor to the $435 million deal. That means higher borrowing costs–but at least the financing is there. Parker closed the deal on November 9.

Andrew Osterland ( is a senior editor at CFO.

Reluctant Backstops

Most investment-grade companies don’t borrow money from banks anymore: they buy the option to borrow money in the form of revolving credit facilities. They occasionally tap the credit lines to fund an acquisition or make some large investment, but typically the credit lines are used as backups for the issuance of short-term commercial paper. The expectation is that the money won’t be used.

While CFOs may be loath to pay for money they don’t use, backup credit lines have proven their worth since September 11. “When the commercial- paper market is disrupted–as it was–backup credit lines provide confidence to investors,” says Glenn Eckert, an analyst with Moody’s Investors Service, which does not rate commercial paper for companies that don’t have 100 percent backup in place.

The need for these credit lines, however, has fallen along with the issuance of commercial paper this year. Since October 2000, outstanding commercial paper has shrunk from $350 billion to $226 billion. Most companies have reduced their programs by choice, opting to lock in low, long-term interest rates in the bond market rather than regularly roll over short-term paper. Many, however, have been forced out of the market because of downgrades in their short-term credit ratings: notable examples include Ford, General Motors, DaimlerChrysler, and, more recently, Kodak and AT&T.

Those companies still using the commercial-paper market, however, need the backup credit. And commercial banks are increasingly averse to offering it. “Backup lines are one of the banks’ least-profitable products,” says financial services analyst Kathy Shanley of Gimme Credit, an investment advisory firm in Chicago. Not surprisingly, the cost of those credit facilities has been increasing for companies in the past few years, as banks look to use their capital in more profitable ways. The facilities have also become a bargaining chip in the “pay-to-play” dynamic of the converging financial- services industry. Banks will provide the facilities if companies use them for bond underwriting or M&A advisory work. Conversely, large companies will give banks desirable fee-generating business if they also offer credit facilities.

“We expect banks to put their balance sheets on the line for us,” says Brian Andersen, CFO of Baxter International. — A.O.


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