Banks are eyeing very carefully the issue of cheap credit lines as Computer Associates International has joined Tyco International, Qwest Communications International and Enron as borrowers that have tapped commercial paper backup lines. The increased use of dirt cheap lines that are typically not expected to be tapped is likely to result in increased pricing and a hard look at tenors on the lines. "Banks are waking up," said one investment-grade banker. "The entire credit spectrum is being examined and this will call into question the whole cheap credit issue. Companies have got away with murder, but the game is over," he stated.
"The increasing use of the drawdown will change the pricing," said Timothy Lucas, director of research and technical analysis at the Financial Accounting Standards Board. "I would assume the fair value of commitments is different today than it was a month ago," he noted. Banks will be looking at the potential next liability in line. "If I saw a pattern then I would change my assessment." The pricing issue had been thrust in front of FASB by investment banks, most notably Goldman Sachs, who complain that commercial banks are not charging the market value of such back up lines (LMW, 1/7). The downside of the backstops is the fact companies draw down at the worst time, Lucas said.
Computer Associates last week drew down on its $1 billion commercial paper backstop line following published reports of investigations by the Securities and Exchange Commission and the Federal Bureau of Investigation over accounting issues. Calls to company officials were not returned, but Sanjay Kumar, ceo, said in a conference call Friday that the SEC is conducting preliminary investigations.
Following the reports of the investigations, the company's commercial paper became more expensive than the back up line. Computer Associates offered 3% yields on its two-week commercial paper, but investors did not bite. The backup line is priced at LIBOR plus 11/ 8%, according to Capital DATA Loanware.
Bankers said they are generally not seeing the tougher terms yet, as most are still trying to help borrowers through the market. "There is always resistance (to quick changes) due to strong relationships and if the credit needs to get done to accommodate the company, it will be done," said a banker. However, material adverse change clauses, tenor and pricing will need to be re-examined, especially for companies operating in certain industries, such as telecommunications, he said. "Some sectors are viewed more favorably than others, but banks are already less willing to provide longer-term revolvers," one banker stated. The issue must be seen in the context of the credit cycle, said another banker. "There is more market risk than anticipated and people are more wary of exposure. When the credit cycle tightens and news breaks, it is invariably bad news," he noted.