New issuance of syndicated, revolving lines of credit dropped 28% by dollar volume in 2009, according to data from Reuters Loan Pricing, as companies shifted their sources of liquidity and reduced reliance on bank credit. The $547 billion in volume issued was one-third 2007’s record issuance of $1.68 trillion, but the drop was less than 2008’s fall of 55%.
Investment-grade issuance in 2009 was slightly less than leveraged issuance. Overall, the total was the lowest amount of dollars committed since 1993, which was before the syndicated loan market took off due to the development of sophisticated risk-management techniques for lenders.
Revolving lines of credit are a critical capital source for payroll, raw materials, and rents. Higher rates and reduced capacity on such debt can mean companies have to consume more of their cash on hand in daily operations and build higher nonoperational cash levels as a buffer against future shortfalls.
“We are seeing clients delever their balance sheets. They’re not pursuing loans or any other kind of capital right now,” says Cathy Bessant, until recently president of global corporate banking at Bank of America. (Bessant was named to a new job at Bank of America last week, head of global technology and operations.) “The general sense in the marketplace is that this is a time to be very focused on a conservative leverage position and on preservation of top-line revenue and profitability,” she says. “And at the same time, companies are using their own cash for much of what they would have used the loan market for in the past.” Still, she expects that conservatism to change during 2010.
Companies are also trying to defer bank refinancing, potentially to replace it with bond financing, says John Walenta, a partner in corporate and institutional banking at Oliver Wyman. Another factor is that leveraged merger and acquisition activity has fallen off substantially in the past 18 months, he says.
Commercial banks are still limiting their overall exposure to corporate lines of credit, according to bank call reports for the third quarter of 2009, but not uniformly. The amount of unused commercial-credit commitments, which banks report as contingent liabilities, dropped in the third quarter for JP Morgan Chase and Citigroup, for example. JP Morgan Chase’s obligations fell to $219 billion as of September 2009 from $247 billon in the first quarter. Citigroup’s commitments fell to $248 billion from $262 billion.
But not all banks reduced such lending. Revolver balances actually rose at Bank of America ($329 billion, up from $269 billion in the first quarter) and Wells Fargo ($99 billion, up from $84 billion).
In negotiating for new credit lines or renewals, many companies are lowering maximum borrowing capacity because their drawdowns have been substantially less than the full capacity of the revolver. Of course, this lowers fees and interest payments for companies, which is especially important as rates above LIBOR on revolvers have risen to 350 basis points and higher.
Carmike Cinemas, for example, an owner and operator of digital and 3D movie theaters, is replacing a $50 million revolver maturing in 2010 with a $30 million facility maturing in January 2013. The company is reducing the revolver’s size even though its cash and cash equivalents slightly declined during the first three quarters of 2009. The new facility will bear interest at a rate of LIBOR plus 400 basis points, with a LIBOR floor of 2.0%. The existing revolving credit facility was undrawn as of December 31, 2009.
Complicating access to revolving lines of credit the next two years will be billions of dollars of maturities in revolving facilities. According to Reuters Loan Pricing, $563 billion in syndicated credit lines comes due in 2010 and another $733 billion in 2011. A predominant portion of the maturities will occur at investment-grade firms.
“The average maturity of a bank-arranged loan is two to three years, so there is always a constant refinancing pipeline,” says Walenta. “My general feeling is the market can accommodate [the maturities] but it will do so on terms comparably more favorable to the banks.”
Revolvers have been the dominant source of liquidity for corporations in the past. In a global sample of 204 firms last year, the median credit line was equal to 15% of book assets, according to a study headed by Karl Lins of the University of Utah. In contrast, total cash holdings of firms in the survey amounted to only 9% of book assets.
The CFOs of the large corporations studied (median revenue $1.6 billion) primarily used lines of credit as “optional liquidity” — to fund future growth opportunities. Companies that indicated a strong need to obtain future external funds, and those that perceived their equity to be undervalued, tended to hold larger lines of credit.