Drawdown line of credit12/28/2023 BACKSTOPPING LINESĬompanies 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 loans at will. The automaker joins Air Canada, Expedia and Wynn Resorts, among others that have drawn roughly US$22.7bn in bank debt collectively this week, as previously reported by Refinitiv LPC.Ĭompanies are also taking on new bank debt to increase financial flexibility, including JetBlue Airways and American Airlines, which both signed US$1bn, 364-day credit lines this week, according to filings with the US Securities and Exchange Commission. On Thursday, Ford Motor Company said it would draw down US$15.4bn from two of its revolving credit lines and suspend a dividend payment, joining several businesses that are burning cash due to the fast-spreading respiratory virus. Lenders thus far, are responding well to the requests, though banks with more limited US dollar deposits could face significant challenges if companies start asking for new money in addition to borrowing under their existing loans. “Requirements are high, and drawdowns have been steady but not overwhelming,” a senior banker said. And most corporates borrowing from these credit lines are investment grade - Baa3/BBB and higher - which should limit the immediate impact on asset quality, according to the Barclay’s report. Through this global framework, referred to as Basel III, banks have been operating with materially higher capital ratios to withstand the increase in risk-weighted assets related to draws on revolving credit lines. “Beyond the underlying stress that is driving these draws, questions have been raised about banks’ ability to meet the funding demands and the implications for capital ratios and asset quality,” Barclays Capital analysts wrote in a Thursday research report.Īfter the crisis of 2008, regulators developed new frameworks on capital adequacy, stress testing and market liquidity for banks. Lenders’ liquidity and the quality of the assets they are required to hold against the capital they loan are also under scrutiny. With this as a backdrop, banks’ abilities to meet funding demands have been questioned. The virus, which has shut down businesses and borders and left north of nine thousand dead worldwide, according to data compiled by the Johns Hopkins Center for Systems Science and Engineering, is expected to deeply impact the global economy. The decision to borrow typically undrawn financings has echoes of the 2008 financial crisis when companies drew down on unfunded credit lines, taking the banks by surprise, and putting a significant strain on their deposits. NEW YORK, March 19 (LPC) - As corporations draw down on revolving credit lines to combat the expected adverse effects on earnings of the coronavirus pandemic, the ability of US and global banks to provide liquidity has come into question.
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