Some CFOs are increasing their lines of credit as recession insurance

Some companies pre-emptively secure additional borrowing capacity in the event of an economic downturn.

Restaurant chain franchise

Restaurant brands around the world Inc.

and utility company

Xcel Energy Inc.

both recently increased their revolving credit lines in part to prepare for a downturn, while the aircraft maker

Bomber Inc.

said a new credit facility could help it in a downturn. High inflation readings which have fallen only slightly recently and the Federal Reserve’s efforts to cool prices by raising interest rates have raises fears of a recession and job losses in the coming year.

Companies can use revolving credit facilities to add liquidity to their balance sheets in the event of an economic shock or periods of financial difficulty. At the start of the pandemic, for example, companies in all sectors relied on their lines of credit to build up cash reserves after the closings, shops and offices were closed.

Bankers describe the padded borrowing capacity as only happening sporadically so far, but some big companies are moving in that direction. Dine Brands, for example, which owns the Applebee’s and IHOP brands, last quarter increased the size of its borrowing capacity under its $100 million revolving credit facility to $325 million. Dine Brands pays an interest rate on installation equal to 2.5% plus the term guaranteed overnight rate. This represents an increase from the 2.15% plus Eurodollar funding rate on its previous facility.

Vance Chang, CFO of Dine Brands Global.


Restaurant brands around the world

“It’s just good to have that money available in case something big and bad happens,” chief financial officer Vance Chang said. The company, which has drawn $100 million from the facility, could also use its line of credit to invest in the business, he said.

Dine Brands, based in Glendale, Calif., had $355.3 million in cash and cash equivalents on its balance sheet as of September 30, up from $263.5 million in the prior quarter and $304.2 million a year earlier. early.

Businesses typically use revolving lines of credit to fund day-to-day cash or working capital needs. In addition to recession planning, some companies are extending credit lines in response to rising input and inventory costs, corporate bankers said.

Globally, companies have refinanced and extended $98.5 billion in revolving credit facilities this year through Nov. 3, up 2% from the year-ago period, according to Dealogic, a provider financial data. The dataset includes revolving facilities that have been syndicated across a group of banks.

Some industries with higher working capital needs, including packaging and chemicals, have increased their credit lines compared to last year, said Vivek Bantwal, co-head of the global finance group at

Goldman Sachs Group Inc.

investment bank, commenting on the New York-based bank’s lending.

Over the past four to six weeks,

Wells Fargo

& Co. has seen more customers take out new term loans, which typically have five-year terms, to pay off a portion of their revolving lines of credit, said Kristin Lesher, head of middle market banking. Companies are taking out the new term loans in an effort to prepare for a possible recession, she said.

The companies say “I’m going to use it to pay off my revolver so that my most flexible capital is more available,” said Ms Lesher, who declined to share loan data from the bank.

There is minimal variation in interest rates between the two types of loans in the syndicated loan market, she said. Banks, for their part, prefer to offer companies a term loan rather than increasing their line of credit because it generates higher returns, she said. Term loans are also funded up front, unlike lines of credit.

The cash that US companies keep on their balance sheets has fallen over the past year as interest rates have risen, but still remains above pre-pandemic levels. Among the 462 companies in the S&P 500 that had reported financial results as of Nov. 15, cash and cash equivalents on the balance sheet fell 13% to $3.19 trillion, according to S&P Global Market Intelligence, a data provider. Among the same companies, cash in 2019, the year before the pandemic began, was $2.19 trillion.

In September, energy company Xcel increased the size of its revolving credit facilities by 15% to $3.55 billion. Minneapolis-based Xcel doesn’t typically tap into its facilities, but instead uses them as back-up liquidity in case it can’t access commercial paper markets as happened during the 2008 financial crisissaid Paul Johnson, the company’s treasurer.

Paul Johnson, Treasurer of Xcel Energy.


Xcel Energy

The company has increased its revolving lines of credit primarily because it is expanding and also faces higher raw material costs, Johnson said. But the bleak economic outlook was also a factor, he said. “I think it’s appropriate to have extra cash in times of economic uncertainty,” he said.

Xcel generally does not allow its commercial paper balances to exceed 40% of its total borrowing capacity under its revolving lines of credit, Johnson said. As of September 30, the company’s commercial paper outstanding was $158 million, at a weighted average interest rate of 3.4%. Under its revolving credit facility, the Company can borrow at the term guaranteed overnight rate plus a margin of between 0.75% and 1.5%.

In the third quarter, Bombardier entered into a new five-year $300 million revolving credit facility. Secured by a working capital guarantee, the facility will allow the Canadian aerospace company to retain less cash to meet its target of $1.5 billion in available cash, chief financial officer Bart Demosky said in a conference call. November 3.

The aerospace company is also taking steps to improve its free cash flow, one of several steps to help it prepare for the current uncertain economic environment, the company’s chief executive Éric Martel said during the meeting. ‘call.

“When it comes to macro factors, we see a lot of varying forecasts of what the coming months and year will bring,” he said.

Write to Kristin Broughton at [email protected] and Nina Trentmann at [email protected]

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