US companies eye credit lines as pandemic worsens, uncertainty soars

[NEW YORK] US companies including Hilton Worldwide and Wynn Resorts have begun tapping their credit lines to shore up liquidity amid growing market uncertainty triggered by the coronavirus outbreak.

Hotel operator Hilton said it plans to draw down on the remaining US$195 million it has on a US$1.75 billion revolving credit facility, according to a Wednesday filing with the US Securities and Exchange Commission (SEC). Wynn Resorts is planning to tap its US$850m revolving credit facility, according to a banker.

Wynn's intention to draw on its credit line was first reported by Bloomberg.

A number of companies have reached out to their lenders with requests to draw down on their revolvers or increase their credit lines, with more expected, as they look to fortify their balance sheets against an uncertain market backdrop, a second banker said.

Companies use revolving credit facilities as backstop financing in case short-term commercial paper lines fail to roll over, and borrowers can draw down, repay, and re-borrow these funding lines at will. For the most part, these facilities pay low rates and remain undrawn.

But the turbulence triggered by the coronavirus is making Wall Street wary that history could repeat itself and a large number of borrowers could start tapping their revolving credit lines at the same time.

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After the 2008 financial crisis, several blue-chip companies drew down on revolving credit facilities, shocking banks that had charged minimal interest margins on the assumption the loans would remain unused.

As fears in the wider markets worsen, companies borrowing their revolving loans "is something we're all keeping an eye on," the first banker said. "But, it hasn't been done broadly yet."

"There's not a lot of outward evidence that there's a reaction in lending to the market swoons. In some cases, there are needs to shore up liquidity. I have not seen generally any deep breach into the bank market," a third banker said.

BAD TO WORSE

It is still too early to gauge the ultimate impact that the coronavirus panic will have on the overall loan market. If nothing else, high-grade lending is usually the most resilient market, given its relationship-driven nature.

"Corporates are paying down debt and managing healthy balance sheets for their cash flow," the third banker said. "We weren't looking at an investment grade market that was particularly stressed."

However, with the situation worsening quickly, bankers are already contemplating possible scenarios if things go from bad to worse.

"If we got to a situation where the US moved to quarantine or to shut down the economy, it could have a knock-on effect. It could have a bigger impact. You would see pricing moving up and tenors moving down; that's a worst-case scenario," the second banker said.

According to the third banker, things could get even uglier, even if banks are willing to stand behind their clients.

"There are companies that will have issues associated with what's going on economically that are going to get squeezed," the second banker said. "We will be there for our longstanding relationships, but the retail bid will disappear. We'll see amendments. Bankruptcies will happen."

"What we're hearing is that the banks are willing to play through, and looking to continue as they have," the third banker said. "No one is sure if there's going to be a pricing change or no pricing change at all."

PANIC MODE

The market is down so significantly because there's so much uncertainty, and several borrowers are looking to shore up liquidity, though regular way refinancings are still taking place.

Travel and leisure companies have tapped their relationship banks for new loans to bolster liquidity as the global spread of coronavirus heightens fears over passenger travel and canceled reservations pile up.

Earlier in the week, cruise ship operators Norwegian Cruise Line and Royal Caribbean, along with air carrier United Airlines, lined up approximately US$3.23 billion in new money collectively on Tuesday, one day after the virus epidemic caused a sell-off across global equity market indices with the Dow Jones Industrial Average dropping 7.8 per cent.

United raised an incremental US$2 billion term loan with a group of banks. At the same time, Norwegian signed a US$675 million revolving credit facility, and Royal Caribbean increased its existing revolving credit line by US$550 million to roughly US$2.28 billion, the companies said in respective filings with the SEC.

"Some companies are pumping up liquidity. There are some loans that are getting done," the third banker said. "There are a couple other cruise lines doing that as well. If you're staring into some uncertainty, you could need some more cash flow. Getting in front of that could be appropriate."

The bank market has changed in the decade since the crisis. International banks have adhered to the Basel II and III agreements put in place by the Basel Committee on Banking Supervision in response to the financial crisis. The measures aimed to strengthen the regulation, supervision and risk management of banks. Investment grade pricing is also wider now.

"Everything I'm telling you reflects a more orderly environment. We're not at that point yet," the third banker said. "All bets are off. We are, in fact, not seeing that and clients that we see in a steady-state world, they're not worried about steady stream liquidity. We're not seeing everybody come in."

REUTERS