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Syndicated Loans

Companies to lean on relationship banks through Covid-19 stress

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Companies in sectors under strain from the Covid-19 outbreak are expected to rely on bank funding if debt markets remain out of reach, using funds from as yet undrawn revolving credit facilities and signing new bridges to bond facilities or bilateral loans.

“Some sectors in particular that are directly impacted by the virus or travel ban, or that have a supply chain to China, might need some liquidity,” said a senior loans banker in London. “What I would assume is that companies will get bilateral loans if they're in need of quick cash.”

Loan markets are typically more reliable than bond and equity markets when the availability of credit begins to dry up in stress scenarios. It tends to experiences less dramatic swings in pricing, enabling borrower to maintain reliable access to funding. Several bankers interviewed for this article did not think lenders would pull back as a consequence of Covid-19.

“Lenders have very intensive relationships [with companies] with no short term changes, and that hasn’t changed,” said a head of loans from a German bank, adding that he had seen no information from his senior management indicating that the bank’s policy has changed with respect to his corporate clients.

“Historically the bank market has supported companies through these types of market dislocation events, and I don’t see why it won’t be similarly supportive through this,” added a head of loans from a US bank.

The same banker said that some companies, particularly those from cyclical industries or those engaged in aviation and travel, will look to preserve liquidity during the coming months.

US airline Boeing signed a $13bn two year term loan A in early February, according to Dealogic, with a margin of 100bp over Libor. Bookrunners were Bank of America, Citi, JP Morgan and Wells Fargo.

“Companies will naturally lean on its closest five or six relationship banks to do [maintain access to liquidity],” the second banker added, referencing the SARS virus outbreak and the 9/11 terror attacks as previous episodes in which firms had to deal with dislocated funding markets.

“But with a 9/11 type crisis the impact is contained — it’s happened, there’s a shock, but financial life moves on. With this it’s a little more unknown: where do you correct price to when you don’t know whether the peak will be in three months or six months?”

Three bankers told GlobalCapital that they expected some specific cases in which companies would draw on revolving credit facilities if public markets remained temporarily out of reach. 

One loans banker from a European lender said: “It’ll be difficult for banks not to fund their outstanding commitments. Some banks refused to disburse funds after September 11 and borrowers sued them and won. Plus if you deny committed funds based on your judgment and the company falls into financial troubles, you’d be in trouble.” 

Another source felt that companies would try to protect their undrawn RCFs, as drawing the debt would signal to the market that they had come under stress.

Other market participants felt that opening up a short term bridge facility would make more sense. 

"Where there’s no immediate market access, we want to do the right thing for our clients and there I'd expect some bridge-to-bond situations," said a head of UK corporate DCM. 

Bridge facilities can be a costly endeavour for large European companies more at home with the wafer-thin margins of the euro bond market.

"You're not going to have a lot of those in the IG world,” added the head of UK corporate DCM. “There's still market access for issuers that aren't in a problematic sector, but it requires a change in mindset, a willingness to look at yield not spread, and accepting a decent new issue premium."

“There have been instances where the loan market was more stable than bonds, like a few years ago before the European Central Bank started easing [monetary policy],” said a managing director for investment grade loans syndication at a major European bank.

“Bond prices are wider than term loans, so we’ve had a few bank deals take out existing bonds. I don't expect it to provide us with very much business at all. It will be a one off or highly specific case by case basis.”

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