Cash-strapped businesses don’t wait for the US bank bailout to free up credit. Instead, dozens are draining billions of dollars in “rainy day” revolving loans previously arranged with the banks.
The massive withdrawals reflect another weak spot in the ailing banking sector. And they show the growing anxiety of businesses about the economy at large. Some borrow out of prudence and prudence, in the hope of allaying their concerns about their access to finance. Others just seem desperate for money.
Among the latest examples: Wednesday, Lear Corp.
, the auto parts maker, said it has drawn down $ 400 million from its revolving credit facility “to protect against possible short-term disruptions in credit markets.”
Lear announced its new loans as well as an aggressive cost reduction plan. Last week, the Southfield, Mich. Company warned that its 2008 performance would be worse than expected. Meanwhile, craft retailer Michaels Stores Inc.,
controlled by private equity firms Bain Capital and Blackstone Group LP, said on Wednesday it would withdraw a revolving loan of $ 120 million.
The downward trend began last month, when Lehman Brothers Holdings Inc.
the collapse further froze the credit markets. The first wave included the automaker General Motors Corp.
, which last month drained the remaining $ 3.5 billion available on a $ 4.5 billion line of credit.
Return to the well
Some of the companies that have used revolving lines of credit since mid-September.
Parent company of American Airlines $ 255 million Goodyear Tire & Rubber $ 600 million Hosting company Host Hotels & Resorts $ 200 million Craft retailer Michaels Stores $ 120 million Auto parts maker Dana Holding $ 200 million dollars
Since then, at least 17 additional companies, including Goodyear Tire & Rubber Co.
, Gannet Co.
and American electric power Inc.
revealed that they have accessed the loan lines. Already heavily indebted companies, such as First Data Corp. and ServiceMaster Co.
did the same. Bankers say more companies should report similar moves.
Guns are like business credit cards. As soon as the loan debt is repaid, the credit is replenished. Most companies view their guns as “rainy day” funds used only in a pinch.
Before the credit crunch last year, many lenders entered into revolving lines of credit on the assumption that customers would likely never use them. As a result, the facilities generally had low interest rates and few terms. This made them unprofitable for the banks.
Analysts say it is not clear how much money companies may be eligible to withdraw from existing credit facilities. By the end of 2007, banks had pledged to lend about $ 2.8 trillion in loans to large corporations such as guns, according to a survey released this month by federal banking regulators. Of this amount, only $ 1.2 trillion was actually accessed by borrowers.
Based on June 30 data on file with the Federal Reserve, Bank of America Corp.
had $ 407 billion in “other unused liabilities” – mostly untapped lines of credit other than credit cards and commitments to fund commercial or residential real estate loans. JP Morgan Chase JPM -0.08%
& Co. declared $ 301 billion in unused loan commitments.
Analysts pointed out that companies would not withdraw anything close to these amounts from either bank.
Still, some businesses can get the money back just in case they need to file for bankruptcy. Money could prove to be essential, as the bankruptcy financing market – which allows companies to meet payrolls and other obligations during restructuring – has largely evaporated.
“They are worried that the funding will not be there if they need it,” said Tuck Hardie, managing director of the restructuring group at investment bank Houlihan Lokey Howard & Zukin.
The trend is stepping up the pressure on some banks, as additional funds paid to a distressed borrower usually add risk to a bank’s balance sheet. They also tie up capital at a time when banks are trying to keep liquidity internally.
Officials at Citigroup Inc.,
for example, tried to persuade customers not to empty their lines, according to a person familiar with the matter. The bankers’ pitch: it is useless, it risks giving the impression that borrowers are desperate and it is bad for the whole financial system.
However, most customers ignored calls from Citigroup and withdrawals are more common than in previous crises, the person said. As the trend accelerated amid the October turmoil, it may be apparent in the third quarter results of companies like Citigroup, which reports its performance on Thursday.
Not everyone is confused. James Dimon, managing director of JP Morgan, said on Wednesday he had not seen customers rushing to mine guns. “We’re not really worried about it,” he said.
But JP Morgan is not immune to the trend.
Last week, for example, American Electric Power borrowed $ 1.4 billion on multiple lines of credit due to “disruptions in debt markets,” the Columbus, Ohio utility said. , in a securities depository. Half of the funds came from a facility financed by JP Morgan and other banks. The latest loans come on top of the $ 600 million that AEP drew in mid-September.
Rackspace Hosting Inc., meanwhile, said on October 10 it had drawn $ 150 million from a credit facility with units of JP Morgan, Comerica Inc., Wachovia Corp., Bank of America and Cullen / Frost Bankers Inc. The San Antonio Information Technology The company’s chief financial officer described the move “as a prudent move based on uncertain economic conditions in credit and banking markets.”
—Robin Sidel contributed to this article.
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