![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Banks tighten conditions on revolving credit extensions
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.
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.
See also: Reassuringly expensive
The domino effect
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Structured products
A guide to home equity investments: the untapped real estate asset class
This report covers the investment opportunity in untapped home equity and the growth of HEIs, and outlines why the current macroeconomic environment presents a unique inflection point for credit-oriented investors to invest in HEIs
Podcast: Claudio Albanese on how bad models survive
Darwin’s theory of natural selection could help quants detect flawed models and strategies
Range accruals under spotlight as Taiwan prepares for FRTB
Taiwanese banks review viability of products offering options on long-dated rates
Structured products gain favour among Chinese enterprises
The Chinese government’s flagship national strategy for the advancement of regional connectivity – the Belt and Road Initiative – continues to encourage the outward expansion of Chinese state-owned enterprises (SOEs). Here, Guotai Junan International…
Structured notes – Transforming risk into opportunities
Global markets have experienced a period of extreme volatility in response to acute concerns over the economic impact of the Covid‑19 pandemic. Numerix explores what this means for traders, issuers, risk managers and investors as the structured products…
Structured products – Transforming risk into opportunities
The structured product market is one of the most dynamic and complex of all, offering a multitude of benefits to investors. But increased regulation, intense competition and heightened volatility have become the new normal in financial markets, creating…
Increased adoption and innovation are driving the structured products market
To help better understand the challenges and opportunities a range of firms face when operating in this business, the current trends and future of structured products, and how the digital evolution is impacting the market, Numerix’s Ilja Faerman, senior…
Structured products – The ART of risk transfer
Exploring the risk thrown up by autocallables has created a new family of structured products, offering diversification to investors while allowing their manufacturers room to extend their portfolios, writes Manvir Nijhar, co-head of equities and equity…