CFOs of U.S. companies stocked up on debt in the final months of 2011, pushing the volume of revolvers to five-year highs. Companies refinanced billions of dollars of looming maturities in droves and increased their credit capacity at the same time.
For all of 2011, banks issued 80% more in dollar volume of lines of credit (LOCs) compared with 2010, according to data from Thomson Reuters LPC. Volumes picked up in the second half of the year, with issuance rising 7.6% over the first half.
“In September and October, there was a rush of refinancings,” says Reuben Daniels, managing partner at EA Markets, a capital-markets advisory firm. “Those companies that could fund have funded.”
What caused the surge in borrowing was not so much concern about credit capacity, says Daniels, but uncertainty about the banking industry and the crisis in Europe. “The motivations are different this time,” he says.
With banks facing a wave of new regulation that could increase their cost of capital and force them to reduce their lending capacity, CFOs wanted to make sure they locked in credit agreements and pricing.
“Generally, companies refinance 6 to 12 months before a loan matures; now companies are refinancing 12 to 24 months before maturity. There is still a lot of uncertainty about banks and what will happen in the next few years,” Daniels says.
If a company refinances a five-year loan after three years, it is essentially paying a double fee for two years, but issuers are saying that’s “a reasonable price to pay to bridge the next three to four years of bank uncertainty,” says Daniels.
Indeed, banks are allowing companies to lock in revolver capacity over longer periods. The dollar volume of 364-day revolvers issued fell to $102 billion in 2011, from $117.4 billion in 2010, as most lenders went out further on the maturity curve. Issuance of revolvers of other maturities increased to $1.8 trillion, meanwhile, compared with $592.8 billion in 2010. During the credit crisis, the volume of longer-maturity LOCs originated sank to as low as $84 billion.
Most revolvers, of course, will go untapped; they are used as “optional liquidity” or a backstop to a commercial-paper program. So as revolver issuance has ballooned, so has the amount of undrawn credit commitments on banks’ balance sheets. As of September 30, 2011, the latest quarter for which numbers are available, corporations had $1.34 trillion in undrawn, available credit (revolvers plus term loans), according to data provided to CFO.com by CapitalIQ. That total represents 26,078 borrowers, holding an average $514.9 million in liquidity from credit.
Those volumes are a large jump from 2010, when there were $866 billion in undrawn credit commitments as of the third quarter, and an even larger increase over 2009, when corporates had $412 billion in untouched borrowing.
As of September 30, General Electric had the largest pool of undrawn credit, $326.3 billion, according to CapitalIQ. Ford Motor was number two, with $17.8 billion in credit available, a $12.7 billion increase over 2010. Wal-Mart’s undrawn credit rose to $16.3 billion in the same period, from $9 billion the year before.