Many companies used their lines of credit at the start of the pandemic to consolidate liquidity and prepare for a possible market collapse.
Now, a few months later, they are repaying the billions of those emergency funds they borrowed, as sweeping Federal Reserve interventions have opened up cheap access to financial markets and offered businesses a chance to strengthen their financial flexibility.
Companies raised more than $ 900 billion in capital through the sale of U.S. bonds between April 1 and August 31, more than double the volume from the previous year, according to data provider Dealogic. Dozens of them have used all or part of the proceeds from their bond sales to repay their revolving credit facilities, rating firm Moody’s Investors Service found.
Revolving credit facilities or lines of credit allow businesses to borrow up to a certain amount at a fixed interest rate to cover short-term financing needs. They are part of a larger funding tool set, which also includes bonds, short term loans, commercial paper, and asset-backed securities, which CFOs use.
“The amount of drawdown this year has been amazing,” said Enam Hoque, a senior engagement officer at Moody’s. Since the early days of the pandemic in the United States in March, companies have borrowed more than $ 310 billion through revolving credit facilities as of August 1, Hoque said. Most of this happened in March and April.
Howard hughes Corp.
, a Dallas-based real estate developer, borrowed $ 161 million on its existing lines of credit on March 10, CFO David O’Reilly said. “When the pandemic hit, we immediately took the facility away to have that money on the balance sheet,” Mr. O’Reilly said. “The importance of cash is at an all time high.”
Howard Hughes raised $ 750 million in early August to repay his outstanding financial obligations, including his revolving credit facility, which allows the company to use it again if needed. “Having access to these facilities gives you the ability to weather a financial storm,” Mr. O’Reilly said.
Companies must meet certain financial criteria once they remove their gun, a procedure called alliance or maintenance testing, which can occur as often as once a quarter.
“Companies don’t want to be put through the maintenance covenant test,” said Evan Friedman, head of covenant research at Moody’s. Going into the bond market can give companies more freedom, as they do not have to demonstrate financial readiness again until the debt matures.
But bond markets can shut down during times of financial stress, which is why many companies leaned on their guns in March and April.
Howard Hughes performed two quarterly tests of his compliance with loan agreements, both 45 days after the quarter close in March and June, according to Mr. O’Reilly. “Restrictive covenants are always a consideration,” he said, adding that the company remains in compliance.
Another factor that helps companies is the high demand for corporate debt from investors.
Wyndham Hotels & Resorts Inc.,
the Parsippany, New Jersey-based hotel operator raised $ 500 million in bonds in August and used part of the funds to repay its existing credit facility, CFO Michele Allen said. “The new offering has been a huge success from our perspective,” Ms. Allen said. The bond has been oversubscribed almost six times, she said.
Low interest rates and other supportive measures from the Fed have lowered the interest companies have to offer investors.
Iron mountain Inc.,
an information storage and management company, this summer sold a total of $ 3.5 billion in bonds. This included a $ 1.1 billion bond issue in August, which, at 4.5%, was the lowest rate at which the company issued debt in the U.S. market, Barry Hytinen said, chief financial officer of the company.
Iron Mountain has paid off the upcoming bond debt along with a large chunk of his gun, Hytinen said. The new bonds extended the maturity of the company’s debt to an average of about 7.5 years, down from 5.5 years, Hytinen said.
Businesses can borrow on their revolving credit facilities as long as there is no material adverse change, or MAC, in their underlying financial conditions. Deteriorating quarterly results may indicate such a shift, which is why many companies rushed to withdraw their lines of credit in March before their next earnings report.
But for many businesses, gaining that extra flexibility comes at a price, as bond issues can be more expensive than what they charge for a line of credit.
The Brink’s Co.
, the security service provider known for its armored trucks, recently sold $ 400 million in new bonds and used a portion of the proceeds to pay off its revolving credit facility.
Brink’s has agreed to pay investors 5.5% interest, double the rate it pays for its billion-dollar gun, CFO Ron Domanico said. “To have the gun fully available, we felt it was a cheap insurance policy,” Domanico said. Brink’s used part of its revolving credit facility for an acquisition.
Credit scoring experts fear, however, that the availability of cheap debt will prevent companies from restructuring their operations. Existing creditors also have no say in whether or not companies should issue new debt, Friedman said. “Getting up in the face of distress is a concern for some businesses,” he said.
Write to Nina Trentmann at [email protected]
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