Wall Street Is Turning Away Some of America’s Safest Borrowers
Wall Street Is Turning Away Some of America’s Safest Borrowers
(Bloomberg) -- Bankers are having to tell America’s biggest, most credit-worthy companies that they’ll need to wait, pay more, or in extreme cases look elsewhere for new loans to bolster their cash buffers.
For many on Wall Street, such a situation would’ve seemed almost unimaginable just a few weeks ago. But with blue-chip corporations tapping existing revolvers at a dizzying clip, alternative funding sources freezing up and capital-markets desks stretched to the limit operationally, banks are suddenly being forced to have some tough conversations.
Lenders are basing decisions on a variety of factors, including their strategic relationship with the borrower, how urgently the company needs the cash, their credit quality and how much more they’re willing to pay, according to high-level bankers who asked not to be identified discussing private transactions.
“It’s precautionary for companies to ask for more liquidity, but prudent,” said Bradley Rogoff, a credit strategist at Barclays Plc. “There is a probability in two months that some of these companies won’t be able to reopen stores or will have sales at some small fraction of what they normally are.”
Banks are continuing to fund revolving credit facilities as requests from companies such as Ford Motor Co. and J.C. Penney Co. to draw them flood in. Revolvers are committed financing, which means that lenders are legally required to provide the cash if they’re asked.
But as companies tap their existing revolving credit facilities, they’re also asking for additional funds in the form of new revolvers and term loans to further bolster liquidity. Banks are under no such legal obligation to provide these.
Safety Net
Many of these investment-grade borrowers haven’t yet been directly impacted by the coronavirus outbreak, but want the cash on hand in case credit conditions or the global economy deteriorate further. That’s in contrast to a number of mostly-junk rated companies in industries such as travel, gaming and leisure that have tapped revolvers because of plummeting revenues.
An industry group for the banks has repeatedly expressed confidence in their liquidity in recent days. Still, while Moody’s Investors Service said in a report Wednesday that capital levels at the biggest global lenders were sufficient to cope with accelerating cash demands from corporations, they also noted that banks must remain vigilant.
“This does not mean that liquidity cannot be pressured at banks when debt markets are freezing up and recession risk is rising in some of the largest economies,” analysts led by Olivier Panis wrote.
The surging demand for bank financing is also being driven by spiking rates in the market for commercial-paper, a type of short-term financing that companies use to make payroll or purchase inventory.
The turmoil in the vital cog of the financial system’s plumbing prompted the Federal Reserve to intervene on Tuesday. If the market calms, companies may go ahead and repay their revolvers and stop seeking out the new loans, market watchers say.
But that will take at least a few more days to unfold, and corporate treasurers might still want to keep the extra cash on hand out of concern funding markets could seize up again.
Read more: Traders look to Fed for answers amid commercial-paper chaos
Some companies that are intent on drawing new loans are having to pay up to access the cash, the people familiar said.
Bankers said that the so-called drawn pricing -- the cost of actually tapping a new loan commitment, rather than just having access to the facility -- is going up, reflecting the riskier macro backdrop.
Investment-grade loan rates are typically very stable. But the past week saw the biggest jump since the financial crisis, one banker said.
“We’ve only really seen a similar use of revolvers and new facilities in the 2008-2009 time period,” said Rogoff, the Barclays credit strategist. “Based on how quickly some of the companies are doing this so far, we think it will likely wind up being a greater amount than we saw then.”
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