Banks Get Tougher on Credit Line Provisions

--banks shortern the terms on lines of credit, known as reovlers --more line of credit was priced on borrower's bond CDS, instead of LIBOR By SERENA NG Banks are shortening the terms on lines of credit that have long been used by companies to avoid cash crunches -- a sign that while lending is reviving, businesses are facing new hurdles to obtaining credit. These revolving lines of credit typically ran for three or five years and let companies borrow at low interest rates, in part because they were rarely drawn upon before the credit crunch. Companies could use the money if they were cut off from other sources of cash such as the commercial-paper market. Now, lenders are cutting the length of many commitments to less than a year. They are charging higher fees for the lines of credit, known as revolvers. And instead of promising an interest rate determined mainly by the company's credit rating, banks will now charge more if the cost of insuring the company's debt against default is higher. The trend, unfolding for months, mirrors what's going on in the rest of the credit markets: Lending is occurring again following last year's freeze. But many borrowers are facing tougher terms. As the economy slows, companies are more likely to need extra cash to keep their businesses running. At the same time, rising loan defaults are making banks more cautious. Even the strongest companies must pay more for revolving credit lines, regardless of their plans to use them. Companies including Hewlett-Packard Co., Baker Hughes Inc. and Verizon Communications Inc. recently obtained new revolvers with such terms, according to Thomson Reuters Loan Pricing Corp. Verizon recently got a new $5.3 billion, 364-day revolver to replace a three-year, $6 billion facility that was to mature later this year. The telecommunications firm will have to pay between 0.75 and two percentage points above the benchmark London interbank offered rate, or Libor, if it borrows under the new facility. The rate on borrowed cash under its old revolver was just 0.2 percentage points over Libor, according to data from Loan Pricing Corp., or LPC. A Verizon spokesman declined to comment. The changes mean that corporations will have to renegotiate their credit lines more frequently. And if their financial condition deteriorates, such funding could become a lot more expensive and more difficult to secure. Already, the higher revolver rates are leading some firms to forgo the credit lines or to issue more long-term bonds if they are able to. Weaker companies are pledging more assets to banks to get or renew revolvers. About 72% of the revolving credit facilities obtained by investment-grade companies in the first quarter of 2009 had 364-day maturities, or tenors, and no companies received five-year lines, according to LPC. In the same period a year ago, 30% of the facilities were for 364 days and 41% had five-year maturities. Most of them aren't backed, or secured, by assets. Roughly $600 billion worth of revolvers are set to mature between now and the end of 2010, according to LPC, leaving dozens of companies facing much tougher terms. The trend towards tighter terms began last year as the credit crunch left banks short of capital due to big losses on mortgages and other loans. Banks also prefer the shorter terms because they can more easily judge credit risk over one year than five. Banks have to hold more capital against longer-term financing commitments than short-term ones, and they typically hedge their exposures by purchasing credit-default swaps that act like insurance against corporate defaults. "A shorter tenor provides visibility into how credits perform and gives banks the option to reassess the situation in 12 months," says Jonathan Burn, head of the high-grade loan syndicate at Barclays Capital in New York. "This happens in every downturn and this downturn is going to be more significant than in the past." The strictures with business credit lines are akin to lenders' new policies for credit-card customers. Many institutions are hitting cardholders with higher fees and tougher terms. Bankers say companies have little choice but to accept the new terms as they balance their needs for rainy-day loans with the higher cost. Toyota Motor Credit is one company facing an interest rate tied to the value of credit default swaps on its bonds. Investors bid up the price of these when they believe a company's financial health is deteriorating. The credit-default swap link provides protection for banks because Toyota probably would only tap the credit line at a time of stress, which would be reflected in the market by higher swap spreads. Toyota Motor Credit's new 364-day revolver will allow it to borrow up to $5 billion at a rate tied to its credit-default swap "spread," ranging from one percentage point to four percentage points over Libor. This spread, which is determined by derivative traders, reflects the cost of insuring the debt from default over one year, and is currently 3.55 percentage points for Toyota Motor Credit, according to Markit, a credit-markets data provider. "We were fine with the new rate because we don't need the money right now and we were able to renew for the full amount of the previous facility," says a spokesman for Toyota Financial Services. Toyota Motor Credit is the U.S. financing arm of Toyota Financial Services, which is part of Toyota Corp. As the economy weakens and conditions in the broader credit markets remain tenuous, the safety net that revolvers provide has become more important. Last fall, when financial markets seized up, a flurry of corporations drew down some or all of their revolvers, including Sprint Nextel Corp., General Motors Co., Tribune Co. and Gannett Co. The moves sparked worries that dozens of other companies and struggling firms would jump on the opportunity to draw down cash while they could at easy terms banks agreed to in earlier years, creating more problems for strained banks. Bankers and analysts say those fears haven't been borne out for the most part, and banks were able to provide the cash when called upon. According to LPC data, U.S. companies drew $38.5 billion from their revolvers in 2008 and $8 billion so far this year. Write to Serena Ng at serena.ng@wsj.com