Revolver Utilization Trends
In Uncertain Times, Companies Aggressively Draw on Credit Lines
In light of the current uncertainty in global markets stemming from the COVID-19 pandemic, U.S. companies have proactively strengthened their cash positions and preserved financial flexibility by drawing down on their committed revolving credit facilities.
Historically, these revolving credit facilities go largely undrawn and are usually used to support general working capital needs or serve as a backup line of credit for corporate cash emergencies. However, according to S&P Global, total revolving credit facilities drawdowns since March 5 now stand at $275 billion, via 630 borrowers based on publicly available information. And these figures are likely higher given publicly traded companies are not required to report the drawdowns immediately and privately held companies are generally not required to report the drawdowns at all.
The Consumer Discretionary sector comprised the majority of the revolving credit facilities drawdowns during that period, representing approximately 43% of the $275 billion. Drilling deeper into the Consumer Discretionary sector, auto manufacturers borrowed the largest amount at approximately $31 billion (representing 27% of the Consumer Discretionary sector and 12% of total sectors during that period). On March 24, General Motors Co. notified its lenders that it would draw down $16 billion across three revolving credit facilities. A few days earlier, Ford Motor Co. announced it was borrowing $15.4 billion on two revolving credit facilities.
Source: S&P Global Market Intelligence
Implications
With the full economic impact of COVID-19 on the global economy still unknown and companies weighing their liquidity options under their revolving credit facilities, management teams will need to consider the following issues if drawing on these facilities:
Financial Covenants: Although “covenant-lite” credit facilities have become more common in the U.S. in recent years, revolving credit facilities versus term loan credit facilities generally still have either a springing financial maintenance covenant or the standard financial maintenance covenant. As such, borrowers will need to assess the impact of COVID-19 on their ability to comply with their financial covenants at the time of the borrowing (assuming test thresholds are met for springing financial maintenance covenant structures). And since testing of financial covenants are measured over the last four fiscal quarters, the negative impact of COVID-19 will likely get captured through 2021 for the borrower.
Representations and Warranties: Before a borrower can draw on their revolving credit facility, a condition precedent to the drawing commonly includes a bringdown of the representations and warranties in the credit agreement. And it is common for credit agreements to contain a representation and warranty that there have been no event that has occurred that resulted in a material adverse effect (“MAE”) on the assets, business or financial condition of the borrower. And for more lender friendly structures, the MAE may also include a forward-looking construct that contains a representation and warranty that there have been no event that has occurred that resulted or could reasonably be expected to result in a MAE on the assets, business or financial condition of the borrower. The definition / construct of MAE’s are usually heavily negotiated between lenders and a borrower, so will vary greatly from credit agreement to credit agreement. It is important for a borrower to review those details carefully as they consider drawing on their revolving credit facility.