Now What?

As banks tend to their balance sheets and seek higher returns on capital, corporate lines of credit are becoming more expensive — and tougher to keep.

Is it an insignificant crack, or a sign that the foundation is about to crumble? That’s what Pepco Holdings found itself wondering when one of the 16 participants in its revolving-loan syndicate recently exercised an option to reduce its exposure by 20 percent.

Any threat to its credit line triggers alarm at Pepco. The $1.5 billion revolver provides liquidity for the electric utility’s unregulated businesses, which have commodity price exposures and mark-to-market collateral activity, says CFO Paul Barry.

“We had heard of several banks dropping out of credit facilities altogether, so we are fortunate. But the surprise is that only one bank has come to us asking to [offset] some of its exposure,” says Barry. “A number of banks are under pressure to do it.”

While investment-grade Pepco has largely evaded fallout from the subprime crunch, CFOs at other companies may see lines of credit shrink or even vanish as more banks scramble to buttress teetering capital structures. In response, Pepco has heightened its credit monitoring of financial institutions. “We want to know our exposure to them as a trading partner, especially with volatile commodity prices,” Barry says. “We have limited or stopped trading with those that pose a significant risk.”

Changes that only marginally disrupt solid borrowers such as Pepco may be more keenly felt in transportation, retail, financial, and other distressed sectors, where routine refinancing arrangements are history. United Airlines, RadioShack, and Radian Group, for example, have gone to unusual lengths in recent months to tailor revolvers or find substitute lenders willing to extend credit lines.

“It’s the worst credit environment I’ve seen, and I’ve been with the company 18 years,” says Bob Quint, CFO of Radian, a $1.3 billion bond insurer. Last April, ahead of a credit downgrade, Radian renegotiated the ratings covenant out of its revolving facility. A less than accommodating bank group cut the commitment size by 37 percent, to $250 million, secured it with Radian assets, and slightly shortened the term. The group also charged an amendment fee of $1.9 million. “For now, we will live with the reduced size of the facility,” Quint says. Radian shifted some funds from its financial-guaranty business to its mortgage-insurance business to cover a shortfall.

In this dicey climate, CFOs face tough questions about revolving credit lines. Are they safe? When the time comes to renegotiate, will borrowers have enough clout to secure a newline on similar terms? The answers pose serious implications for day-to-day operations and long-term growth.

Bad Feelings

At banks with huge mortgage losses and write-offs, idle commercial lines of credit are shrinking — but not because companies are borrowing more. According to the Federal Reserve, Wachovia Corp.’s unused commercial-credit commitments to U.S. companies dipped to $151 billion in the second quarter, 10 percent less than a year earlier. Merrill Lynch’s commercial bank reports that unused lines dropped by 25 percent, to $31.3 billion, while Cleveland-based National City reports a modest 7 percent pullback in corporate lines of credit, to $20.5 billion.

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