The hardball tactics adopted by banks continues, with CMS Energy the latest company to face the backlash of a market struggling to come to terms with the aftershock of accounting scandals. The Dearborn, Mich., energy company was able to get all 21 banks in its lending group to agree to amend $1.15 billion in existing bank facilities last week and six banks to agree to a new $150 million line, but not without some painful concessions. "Probably the hardest decision was to agree to a limit on common dividends on CMS stock to about 50% of the current level," said Al Wright, cfo, in a conference call to analysts. Other bad medicine includes a hike in the spread to 3% over LIBOR on most of the lines and covenants that dictate asset sale proceeds must pay down outstanding amounts on the new facilities before they can be used for other purposes.
But it is the dividend concession that has raised the ire of some analysts, particularly in light of the company's plan to tap the equity and equity-linked securities markets. "If you are supposed to issue new equity to strengthen the equity-to-debt ratio, this is not exactly helpful," said Winfried Fruehauf, analyst at National Bank Financial. Wright acknowledged the trade-off between the bank group and the interests of management, noting that CMS needed 100% approval from its banks and the balance on the dividend reduction was struck at 50%. Some banks would have preferred a lower dividend, but they understood the importance of the dividend to ensure access to the equity and equity-linked securities market, he added. Officials at Citicorp/ Salomon Smith Barney, Barclays and BANK ONE, which lead the facilities, did not return calls by press time.
CMS is just one of many companies struggling to refinance credit lines. Mirant is negotiating with its lenders to refinance its $1.125 billion revolver and has offered to cut the line by one-third and increase pricing by 100 basis points (LMW, 7/8). But even with that offer, some banks are holding out and Mirant has threatened to term out the loan. Nortel Networks also played chicken with its bank group this past April and ended up terming out the loan overnight (LMW, 4/15). "Bank are being a lot more careful [because] they have been burned by losses from WorldCom and Tyco International," one banker said. "Almost everyone is facing hardball tactics."