Many companies drew down their traces of credit score within the early days of the pandemic to shore up liquidity and put together for a possible market collapse.
Now, a number of months later, they’re paying again the billions in such emergency funds they borrowed, as sweeping interventions by the Federal Reserve opened up low cost entry to capital markets and provided firms an opportunity to bolster their monetary flexibility.
Corporations raised over $900 billion in capital by means of U.S. bond gross sales between April 1 and Aug. 31, greater than double the amount from a yr earlier, based on knowledge supplier Dealogic. Dozens of them have used some or the entire proceeds of their bond gross sales to pay down their revolving credit score services, rankings firm Moody’s Traders Service discovered.
Revolving credit score services or traces of credit score enable firms to borrow as much as a specific amount at a set rate of interest to cowl short-term funding wants. They’re a part of a broader funding device equipment, which additionally consists of bonds, loans, industrial paper and asset-backed securities, that finance chiefs use.
“The quantity of drawdown exercise this yr has been astonishing,” mentioned Enam Hoque, a senior covenant officer at Moody’s. Because the early days of the pandemic within the U.S. in March, firms borrowed greater than $310 billion by means of revolving credit score services as of Aug. 1, Mr. Hoque mentioned. Most of that got here in March and April.
Howard Hughes Corp.,
a Dallas-based real-estate developer, on March 10 borrowed $161 million beneath its current traces of credit score, mentioned Chief Monetary Officer David O’Reilly. “When the pandemic hit, we drew down the services instantly to have that money on the steadiness sheet,” Mr. O’Reilly mentioned. “The significance of money was at an all-time excessive.”
Howard Hughes raised $750 million in early August to pay down excellent monetary obligations, together with its revolving credit score facility, permitting the corporate to faucet it once more if wanted. “Getting access to these services provides you the flexibility to navigate a monetary storm,” Mr. O’Reilly mentioned.
Companies have to satisfy sure monetary standards as soon as they draw down their revolver, a process known as covenant or upkeep testing, which may happen as often as as soon as 1 / 4.
“Corporations don’t need to be topic to the testing of upkeep covenants,” mentioned Evan Friedman, head of covenant analysis at Moody’s. Going to the bond market can provide firms extra freedom, as they don’t should display their monetary health once more till the debt matures.
However bond markets can shut throughout phases of monetary stress, which is why many firms relied on their revolvers in March and April.
Howard Hughes had two quarterly exams of its compliance with lending agreements, each 45 days after quarters closed in March and June, based on Mr. O’Reilly. “Covenants are all the time a consideration,” he mentioned, including that the corporate stays in compliance.
Robust demand for company debt from traders is one other issue serving to firms.
Wyndham Hotels & Resorts Inc.,
the Parsippany, N.J.-based resort operator, in August raised $500 million in bonds and used a number of the funds to pay down its current credit score facility, mentioned finance chief Michele Allen. “The brand new providing was an amazing success from our perspective,” Ms. Allen mentioned. The bond was almost six occasions oversubscribed, she mentioned.
Low rates of interest and different help measures by the Fed have pushed down the curiosity that firms have to supply to traders.
Iron Mountain Inc.,
an info storage and administration firm, this summer season bought a complete of $3.5 billion in bonds. This included a $1.1 billion bond issuance in August, which—at 4.5%—was the bottom charge at which the corporate has issued debt within the U.S. market, mentioned Barry Hytinen, the corporate’s CFO.
Iron Mountain paid down coming bond debt in addition to a big chunk of its revolver, Mr. Hytinen mentioned. The brand new bonds prolonged the corporate’s debt maturity to a median of about 7.5 years, up from 5.5 years, Mr. Hytinen mentioned.
Corporations can borrow beneath their revolving credit score services so long as there isn’t any materials hostile change, or MAC, of their underlying monetary circumstances. Worsening quarterly outcomes can point out such a change, which is why many firms rushed to attract down their traces of credit score in March earlier than their subsequent earnings report.
However for a lot of firms, gaining that extra flexibility comes at a value, as bond issuances could be dearer than what they’re charged for a line of credit score.
The Brink’s Co.,
the safety supplier recognized for its armored vehicles, lately bought $400 million in new bonds and used a number of the proceeds to pay down its revolving credit score facility.
Brink’s agreed to pay traders 5.5% in curiosity, or double the speed that it pays for its $1 billion revolver, mentioned finance chief Ron Domanico. “To have the revolver absolutely out there, we felt it was an inexpensive insurance coverage coverage,” Mr. Domanico mentioned. Brink’s used a portion of its revolving credit score facility for an acquisition.
Credit score-rating specialists, nonetheless, fear that the supply of low cost debt is taking away incentives for firms to restructure their enterprise. Current collectors additionally don’t have a say in whether or not firms ought to concern new debt or not, Mr. Friedman mentioned. “Levering up within the face of misery is a priority for some firms,” he mentioned.
Write to Nina Trentmann at [email protected]
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