The crisis in money markets has been a running theme here on FT Alphaville recently, particularly its potential impact on your average, run-of-the-mill corporate. Soon we may have more of a clue just what some of the effects might be.
Ford Motor has $1.5bn in debt coming due today; whether it uses cash to pay that down or part of its $11.5bn revolving credit line will be an interesting datapoint for money markets as well as a gauge of corporate confidence in the banks.
The credit line, part of a larger restructuring plan negotiated in 2006 (along with $23.4bn of borrowings), is complicated by the collapse of Lehman Brothers. Bloomberg reports:
Ford said Sept. 16 that it was assessing the effect of Lehman Brothers’ bankruptcy on $1.13 billion in lending agreements with the automaker. Two Lehman subsidiaries made credit commitments starting in late 2006, Ford said in the U.S. regulatory earlier this month. Those units weren’t included when Lehman sought court protection Sept. 15, the automaker said.
Lehman Commercial Paper Inc. committed $890 million of the $11.5 billion revolving credit line and Lehman Brothers Bank provides $238 million of $16.3 billion in “liquidity facilities'’ for Ford Motor Credit, the automaker said.
Tapping credit lines, in normal times, was something of a major warning sign (along the lines of “bankruptcy imminent”) to investors.
Today, with the increasing importance of cash and the fear of counterparty collapse, it’s becoming more common.
Companies including Carmike Cinemas and General Motors have used their facilities recently, accessing cash while it’s still available. US office supply store Staples has managed to shift its credit agreements (a $750m revolving line and a $400m term loan) with Lehman Commercial Paper to Barclays.
From the Wall Street Journal last week:
As of June 30 last year, the latest period for which data are available, banks had pledged to finance about $2.3 trillion in big corporate loans - those more than $20 million and syndicated by multiple banks, according to the Federal Reserve’s Shared National Credit Exam. Of that, borrowers had drawn down about $835 billion - meaning that nearly $1.5 trillion remained untapped but available. A caveat: Banks reported that loan data before the credit crisis hit in August last year, and analysts say it’s likely that companies have drawn down many of their credit lines since then.
A rising tide of credit line taps would be worrying for banks, as Clusterstock notes:
Unlike bond issuances and syndicated term loans, banks cannot easily hand the credit risk and capital requirements onto other investors. In short, when borrowers draw down revolvers that money comes out of Wall Street’s coffers. With banks still highly levered and under tremendous balance sheet pressure these days, the threat of corporations drawing down their revolvers could exacerbate the situation. In a worst case scenario, banks could be forced to sell assets or raise money to cover the loans.
In fact, that might be a bit of an exaggeration. The loan commitments on revolving credit lines, once agreed, count against the banks’ capital ratios from the get-go.
It’s actually more of a liquidity problem — bank managers may not necessarily count on the facility being fully drawn out. If that happens, on a mass scale, it could impact banks abilities to make new loans to other borrowers. In short, excacerbating the current liquidity crisis.
