Revolving Credit Access Tightens, Rates Rise - CreditSights

Lenders are cutting back on the revolving lines of credit they extend to corporations and raising the interest rates they charge, according to research Thursday by CreditSights.

CreditSights analyst Chris Taggert said the trend is affecting even the most stable corporations, and he predicted that companies that have their credit limits lowered will see hits to their stock and debt prices, and may become increasingly vulnerable to their competitors.

"These developments have CFOs and corporate treasurers on red alert," Taggert said. "The repercussions from the changes span the spectrum of reduced cash flow to finance growth opportunities to the loss of the liquidity necessary for survival."

Though the systemic danger that seized the credit markets last fall has passed, the ongoing economic downturn is causing more and more high-risk corporations to rely more on their bank credit lines than expected, Taggert said. That, combined with banks' own efforts to conserve capital, is making it hard for even the most solid investment-grade companies to get the same amount of credit, or on the same favorable terms.

Taggert said in most, but not all, of the recent cases in which a company has had to renew revolving credit lines, its lenders have offered less credit than in the previous agreement.

United Parcel Service Inc. (UPS) recently saw its $4.5 billion credit line replaced with a $3 billion line, while Rockwell Automation Inc. (ROK) had its credit line cut by $65 million to $535 million. Boeing Co. (BA) had its $1 billion one-year credit line refinanced in full, however.

In all cases, including Boeing's, the cost of borrowing under the new facilities has risen sharply. Taggert said borrowing under new revolving agreements is at least three times as costly as in the past agreement.

Revolving credit capacity is usually overlooked in calculating an investment-grade company's strength, Taggert said, because revolving lines are so easy to come by in normal economic times, and even during mild contractions. But in the current period of major stress on the financial system, access to revolving credit lines will become an increasingly important metric, he said.

Taggert said investors can expect companies that have their lines trimmed and their borrowing costs raised to say that the cuts represented unneeded capacity and that the raised costs are manageable.

But the true effect will show up in their declining cash flow levels, he said, which will mean less money for dividends and buybacks at the very least, and for less solid companies it will mean less money for growth and maintenance. The most credit-challenged companies in competitive markets may become easier prey for their competitors when their credit lines are cut, he said.

- By Ed Welsch, Dow Jones Newswires; 201-938-5244; [e-mail]