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.

Data from Reuters Loan Pricing Corp. shows that revolver issuance to companies was tepid in the first half of 2008 — just $288.2 billion, almost 50 percent less than in the first half of 2007. “If banks are feeling bad about life, they start chopping unused lines wherever they can,” warns Christopher Whalen, managing director of Institutional Risk Analytics, a firm that monitors bank safety and soundness.

Tremors can be felt far beyond commercial banks. Other financing sources, including institutional investors, show scarce interest in standing behind corporate lines of credit. For borrowers, says David Casper, executive managing director of BMO Capital Markets, “the world has gotten a lot smaller in the last six months.”

As pivotal cogs in the corporate credit growth engine, institutional investors have no need to back revolvers with low fees on large commitments. “Investors don’t want in-and-out activity,” says Steven Bavaria, a managing director in leveraged finance at rating agency DBRS. “They want to get their interest coupon every three months and have the money outstanding earning a return.” Even in good times, says Mike McAdams of Los Angeles–based Four Corners Capital Management, many investors participated in revolvers only to stay on line for term loans.

Before financial institutions can even extend credit lines to corporate customers, they must tend to their debt. Together with seven of their money-center peers, Bank of America, Citigroup, and JPMorgan Chase must refinance $247 billion of bonds maturing between October and March 2009, according to Dealogic. Worse, as of September, nearly one in five banks stood on the verge of credit downgrades by Standard & Poor’s, up from 9 percent in similar straits a year ago.

Rising demand and weaker credit spell one sure outcome: more-expensive debt for lenders and borrowers. Bankers’ borrowing spreads have already doubled since early January, to 377 points over LIBOR and 105 points more than the tab for investment-grade nonfinancials.

The ripple effect on Main Street is clear, says BMO Capital’s Casper: “If a bank has to raise money at 8 percent, it can’t lend at 6 percent.”

Managing Down

Even capital-constrained banks cannot simply yank lines of credit without repercussions, says consultant John Walenta, a partner in corporate banking at Oliver Wyman. But they can seek modifications, especially if a company is close to violating a covenant. If a bank is already committed, the focus may shift to “just managing down the size of the line,” Walenta says, especially if a borrower rarely uses more than a fraction of the balance. Banks may not pull credit lines overnight, but “they will say, ‘Our relationship with you on this particular facility is coming up for renewal — find yourself another bank,’” says Bob Graves, co-chair of the banking and finance practice at Jones Day. “Banks’ credit committees are getting much more finicky.”

Hampered by restrictions on its line of credit, troubled UAL, parent of United Airlines, often won concessions by demanding them. But recently it had to dangle an exceptional offer in front of lenders to temporarily ease a restrictive covenant. The company paid a 7 percent fee ($109 million) so earnings could at times slip below fixed charges without triggering technical default.


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