Banks Tighten up Lines of Credit

Mark Crawford
July 28, 2009 | COMMENTS

Because it's harder for businesses to maintain liquidity in this economy, some banks are starting to minimize their risk by tightening access to revolving lines of credit, increasing interest rates, and shortening maturities, according to CreditSights, a leading independent capital structure research firm. This makes it even tougher for companies to operate, because they depend on their revolving lines of credit to finance payroll, buy supplies and equipment, and make capital improvements.

According to www.CFO.com, unused commercial-credit commitments at large banks shrank in the first quarter. “Unused commercial credit commitments dropped to $262 billion in the first quarter of 2009, down from $405 billion a year earlier; JPMorgan Chase's obligations fell to $247 billion, from $311 billion; and Bank of America's dipped to $269 billion, from $305 billion,” writes Vincent Ryan. “New issuance of corporate revolvers is also down for the first half of 2009.”

"Revolvers represent contingent liabilities for the banks," says Richard Speer, chief executive at bank consultancy Speer & Associates. "They're trying to reduce their risk levels and focus on managing their exposure. It's typical right now for them to tighten."

Maturities are also shortening. “Five-year revolvers, for example, are being eliminated entirely or "split" between a 364-day maturity and one that goes out to three years,” says Ryan. “The percentage of revolvers with 364-day maturities reached 50% in the first half of 2009, according to Reuters Loan Pricing. As late as 2007, less than 20% of new issuances had maturities as short as 364 days.”

Some companies, if they are highly leveraged, can negotiate with their lenders regarding terms of maturity and rate increases—for example, they can secure longer maturities but in return must pay higher interest rates. Not knowing how long the recession will last, the first survival instinct for many is to simply lock in credit, even if it costs more to do it.

“There are other disadvantageous terms seeping into revolver agreements,” adds Ryan. “Tying revolver spreads to spreads on the company's credit-default swaps or a credit-default swap index like CDX is one. Concerns about rating agencies are giving this pricing method a boost. ‘Springing maturity' provisions are another tweak that undercuts the stability of revolvers. These provisions exist to keep a lid on a company's total outstanding debt. In one example, if senior secured leverage exceeds a certain percentage on a future test date, the revolver matures earlier.”

This is a highly condensed version of a longer article by Vincent Ryan entitled “Banks Take Aim at Revolvers” that was posted on www.cfo.com. Read the complete version online here.