More stringent terms and conditions are being attached to revolving credit facilities (RCFs), although banks are still extending them to investment-grade corporates. Analysts and bankers agree that RCFs are becoming more expensive and smaller and will contain stricter covenants."The boot was on the issuer side some two years ago. Now, banks will charge more and want more financial covenants for new or renegotiated facilities. I don't think they'll cut an unexpired RCF, but where a corporate has had significant headroom to draw down more, the headroom will be reduced if at all possible," predicts John Hatton, a London-based credit officer at Fitch Ratings.
Revolving credit facilities (RCFs or revolvers) are committed lines of credit that a corporate will often negotiate when securing primary financing. These revolvers act as a safety net to meet liquidity needs when other options are either unavailable or unfavourable. In October, the International Monetary Fund estimated there are €6 trillion of corporate committed lines globally.
There have already been several examples of RCFs being reduced in size and becoming more expensive. German energy giant E.ON secured a new RCF of €7.5 billion, trimmed down from the previous €10 billion. Car hire company Avis Budget had its RCFs cut from a previous level of $1.5 billion to $1.15 billion, while its borrowing costs increased 2.5%. Property developer Bovis was granted a new revolver but with 'new covenants [that] reflect more appropriately the current trading conditions'.
"In the case of renewing existing facilities, clearly pricing - which recently has become more and more tied to credit default swap (CDS) levels - will become more dynamic in how it moves," says Jeffery Weaver, head of credit portfolio management at Ohio-based KeyCorp and a director at the International Association of Credit Portfolio Managers.
The most prominent example is Nestlé's new revolver extended on November 19, which was reduced from €6 billion to €5 billion. "Nestlé has linked the pricing on its backstop to its CDS levels in order to ensure that banks would be compensated appropriately for Nestlé risk," the company stated in a press release.
With an intimidating volume of corporate debt maturing next year - Standard & Poor's (S&P) estimates $282 billion in Europe alone - and many traditional funding avenues blocked, there is fear of a further wave of drawdowns on back-up facilities.
Yields in S&P's US commercial paper index reached record highs of 4.24% on October 2. According to figures from Thomson Reuters, borrowers in Europe, the Middle East and Asia signed 1,197 loans for $1.04 trillion last year, the lowest syndicated borrowing since 2004.
In the US, IT consultancy Computer Sciences and Gannett, a newspaper publisher, drew down $1.5 billion and $1.2 billion respectively in October, both citing an inability to access the commercial paper market. On October 17, media company Tribune drew down $250 million of its RCF on October 17 and promptly filed for Chapter 11 bankruptcy on December 8.
David Scharfstein, a professor at Harvard Business School (HBS), pointed out that the majority of the 22 reported US drawdowns - totalling $16 billion - were by lower-quality US corporates, with credit default swap (CDS) spreads of 1,500 basis points or more.
With their backs to the wall, banks started to hoard capital and slash lending. HBS figures show that revolver originations in the US fell by 39% from September to November 2008, and demonstrate that the more exposure a bank had to RCFs, the more it would cut lending.
However, the tighter conditions on renewed revolvers may not mean US corporates will be starved of credit - with the Federal Deposit Insurance Corporation (FDIC) underwriting the investment-grade commercial paper and corporate bond market, some US bankers believe these sources of funding will become accessible again, providing alternatives to revolver drawdowns.
"Ever since the government guaranteed the CP market, it's getting better and better," said one New York-based head of credit portfolio management at a major European bank.
Yields on S&P's US Commercial Paper Index reflect this, tumbling to 0.69% on January 15, far lower even than pre-Lehman levels. The corporate bond market has witnessed a surge in issuance too: on January 16, Bloomberg claimed non-financials in the US had issued $28.3 billion in bonds since the beginning of the year.
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