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Wall Street is quietly telling companies not to draw their loans

Michelle F. Davis and Paula Seligson, Bloomberg News on

Published in Home and Consumer News

NEW YORK -- The biggest U.S. banks have been quietly discouraging some of America's safest borrowers from tapping existing credit lines amid record corporate drawdowns on lending facilities, according to people familiar with the behind-the-scenes conversations.

For Wall Street, it's not an issue of liquidity so much as profitability. Investment-grade revolvers -- especially those financed in the heyday of the bull market -- are a low margin business, and some even lose money. The justification is that they help cement relationships with clients who will in turn stick with the lenders for more expensive capital-markets or advisory needs.

That's fine under normal circumstances when the facilities are sporadically used. But with so many companies suddenly seeking cash anywhere they can get it, they're now threatening to make a dent in banks' bottom lines.

So far, it seems some corporations are willing to oblige, turning instead to new, pricier term loans or revolving credit lines rather than tapping existing ones. McDonald's Corp. last week raised and drew a $1 billion short-term facility at a higher cost than an existing untapped revolver. The rationales will vary from borrower to borrower, but market watchers agree that for most, staying in the good graces of lenders amid a looming recession is important.

"The banker is coming at it trying to manage two things -- the relationship profitability and their portfolio of risks and assets," said Howard Mason, head of financials research at Renaissance Macro Research. "Bankers have some cards to play because they can talk to their clients that have undrawn credit lines. The sense is that there's a relationship involved so relationship pricing and good will applies."

That's not to say that liquidity doesn't factor into the equation for banks at all. While there's little concern that they won't be able to meet all the funding needs of their corporate clients, there's also little appetite to push the envelope.

 

To that end, U.S. financial institutions have sold almost $50 billion of bonds over the past two weeks to bolster their coffers, and corporate bankers are advising companies not to hoard cash unless they urgently need it. Some are even telling certain clients to hold off on seeking new financing to avoid over-stressing a system already stretched to its limits operationally as bankers are inundated with requests while stuck at home due to the coronavirus pandemic.

"The banks are open but if everybody asks at the same time then it's going to be difficult from a balance sheet perspective," Bloomberg Intelligence analyst Arnold Kakuda said in an interview.

Still, the significant capital requirements needed to fund tapped facilities and the strain mass drawdowns put on profitability as bank funding costs rise and the macro backdrop worsens remain the main driver, said the people familiar with the matter.

"The corporate banker doesn't want everybody to take a hot shower at the same time in the house," said Marc Zenner, a former co-head of corporate finance advisory at JPMorgan Chase & Co. "They want to use their capital where it's most beneficial."

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