America’s biggest banks, inundated with loan applications from blue-chip companies in recent weeks, are starting to use their new leverage on U.S. businesses to squeeze safer, more favorable terms into billions of dollars in transactions.
Anti-hoarding clauses, interest rate floors and mandatory prepayment clauses – provisions most often found in transactions rated for garbage or bridging loans – creep into quality financing, because demand exceeds the amount Wall Street is willing to lend. Banks are even starting to raise the rates that some companies such as General Motors Co. have to pay, a rarity in a market where borrowing costs have fallen significantly since the last financial crisis.
The changes highlight the shifting power dynamics in a business where, under normal circumstances, banks would often seek to compete with each other to provide cheap lines of credit, as part of an effort to secure relationships. with the clients they hope will stay for more expensive needs. Now, as the wave of borrowers using existing revolvers threatens to reduce profitability and bankers seek to conserve cash for those who need it most, they are starting to push companies to make concessions.
“Banks have faced a wall of demands for liquidity from their customers,” said Robert Smalley, credit analyst at UBS Group AG. “They want to make sure they can provide that liquidity on a timely basis, and they want to do it at the right price.”
The concessions apply largely to new financing, where banks have more recourse to dictate terms. They contrast with the waivers that some borrowers, especially the riskier ones, have recently been able to obtain on existing loans from lenders worried about triggering defaults.
Many of the new arrangements can be found in loans to companies near the bottom of the investment ladder, or in sectors directly affected by the coronavirus outbreak. While the exact covenants attached to transactions depend heavily on the specific circumstances of borrowers, the fact that they are embarking on new loans shows how much the market has changed in recent weeks, industry watchers say.
Representatives of JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc., among the industry’s largest lenders, declined to comment. Wells Fargo & Co., another big player, said it was committed to helping customers but would not comment on specific agreements.
Details on the new restrictions
Among the most innovative changes appearing in new transactions are the anti-hoarding measures designed to ensure that businesses do not use revolving credit facilities until they actually need the funds.
This has been a growing frustration among bankers over the past month and a half, as operationally stretched loan bureaus have been inundated with withdrawal requests.
In the case of Valero Energy Corp.’s recent $ 875 million one-year gun, the stipulation limits access to funds to working capital needs, according to a company file. A provision in a new credit facility for health care provider Henry Schein Inc. prevents the company from exceeding a certain cash balance. Similar clauses are expected in other upcoming short-term loans currently under discussion, according to people familiar with the agreements.
This is not the only protection that is starting to appear.
Interest guarantees for lenders, known as LIBOR floors, are more often associated with leveraged loans, but increasingly appear in blue chip transactions. Caterpillar Inc., DuPont Inc. and Mohawk Industries Inc. have completed new transactions in recent weeks with 0.75% guarantees.
Zero-percent floors, or no floors at all, have traditionally been the norm in the quality loan industry. But after the Federal Reserve cut rates below 0.25% in response to the Covid-19 pandemic, banks are looking for protections that guarantee minimum payments, especially as their financing costs increase.
Mandatory prepayment clauses – provisions ensuring that banks are the first to be repaid when companies regain access to the bond market – are also added to some transactions.
The stipulation, typically paired with short-term bridge financing used for acquisitions, was part of Pioneer Natural Resources Co.’s $ 905 million revolver earlier this month, according to a company filing.
Loans are also getting more expensive
While demand for bank financing has eased in recent weeks, with the opening of capital markets Up to companies with less healthy balance sheets, it remains nonetheless robust.
Among all credit ratings, companies in the Americas have drawn $ 226 billion in revolving facilities and received $ 82 billion in new revolvers and term loans since March 9, according to data compiled by Bloomberg. This allowed banks to simply charge some businesses more for borrowing.
Earlier this month, General Motors had to pay an additional 50 basis points to refinance part of its $ 16.5 billion revolver. GM’s cost of funds was still relatively cheap compared to the rate on some of its bonds with similar maturities, but the increase – a product of greater macroeconomic volatility and growing stress on the auto sector in particular – reflects the growing power of banks to dictate terms.
“When you get in late in credit cycles, everything is in favor of borrowers, until you don’t,” said Noel Hebert, director of credit research at Bloomberg Intelligence.
—With help from Marcus Lefkandinos and Lara Wieczezynski.