Money for Nothing

Barnes Group Inc. isn't used to being fawned over by banks.

The $1 billion manufacturer of jet-engine components and engineered springs doesn't even have a credit rating, though CFO William Denninger guesses it would rank at just about the bottom of the investment-grade barrel, BBB or BBB-, if the company went to the expense of buying one.

Nonetheless, Denninger has seen what life must be like with a gilt-edged balance sheet. Early this year, he watched Barnes's treasurer, Lawrence O'Brien, emerge from a meeting with the company's 11-lender bank group with a host of improvements to the company's $175 million credit revolver. O'Brien was able to negotiate a 25-basis-point decrease in the borrowing rate, while carrying over a previously negotiated accordion feature that allows the Bristol, Connecticut-based company to raise up to $75 million of new bank commitments under the existing facility. He was able to extend the revolver's maturity by almost 20 months — putting it back to a full five-year term — and increase the company's overall borrowing limit to 4 times EBITDA from 3.25 times.

For good measure, O'Brien also won approval for his company's new international Swiss holding company to borrow directly against the revolver. Some in Barnes's bank group don't often venture offshore, notes Denninger, but extending borrowing authority to the Swiss entity made so much sense for Barnes that the bankers allowed it. "Right now, virtually all of our debt is in the United States, but we generate the majority of our cash in our offshore operations and can't use that cash to pay down the debt in the U.S.," he says. "This will allow us to borrow offshore, where we generate our cash, and therefore use that cash to pay down those borrowings." (For a look at the tax considerations of using foreign assets as loan collateral, see "Deemed If You Don't.")

Beating the Borrowing Bushes
Barnes is far from alone in finding lenders to be generous these days. Healthy profits have companies and their lenders around the globe awash in cash. Fitch Ratings recently surveyed 500 U.S. industrial companies with credit ratings ranging from A to BB — the very middle of the market — and found that, on average, they had twice as much cash on their balance sheets as short-term debt, up from a ratio of 0.5 to 1 in 2000. CFOs insist they aren't saving for a rainy day, but cash hasn't exactly been pouring out of corporate coffers. Until the latter half of last year, merger-and-acquisition activity was moderate, and capital-expenditure outlays haven't been extraordinary either. With companies so flush, it's not surprising that since 2004, banks have been beating the bushes for customers and offering enticing terms to win their business.

"Everybody's looking for funded assets," says Joseph Chinnici, managing director and head of debt-capital markets for KeyBanc Capital Markets, referring to bank loans and actual borrowings against credit revolvers. Many if not most investment-grade companies take out a credit revolver but never borrow against it, so the banks make little or no money on it. "There is too much liquidity chasing too few dollars," says Chinnici. Exacerbating the situation, new lenders, including insurance companies and hedge funds, have come wading into the market, making competition for business all that much keener. "When a [credit] facility does become available where it would be drawn or utilized," he adds, "banks just fall all over themselves to get involved." Confirms Helen Shan, vice president and treasurer of investment-grade $5 billion postage-services company Pitney Bowes Inc., in Stamford, Connecticut, "We have more banks wanting to give us credit than we necessarily want or need."

To their credit — or eventual chagrin, should it turn out that they've been too aggressive — banks have been successful at whipping up business. Reuters Loan Pricing Corp., which tracks and analyzes global credit markets, reports that U.S. loan issuance, including revolvers, hit a record $1.5 trillion last year. That included a record $500 billion–plus in leveraged (non-investment-grade) lending and a second-highest-ever $669 billion in investment-grade lending. Among the incentives banks offered to make that happen: low prices. Tim Houlahan of Wells Fargo Syndications and head of origination and structuring for the U.S. corporate banking segment, says average loan pricing in the BBB market was down about 40 percent from 2003, driven in part by strong lender demand for funded assets and low default rates. Price declines weren't as dramatic for higher investment-grade borrowers, in part because many of these facilities are established to back up commercial-paper issuance and have historically been tightly priced. Meanwhile, banks have been willing to extend credit for longer terms. In 2002, Houlahan says, about 70 percent of syndicated loan volume was issued on a 364-day basis; now, less than 10 percent of loan volume is issued for that term. Five-year terms are readily available for both investment-grade and leveraged borrowers, and some banks have even offered six- or seven-year terms for some clients.

Debt-market analysts credit all this easy money for keeping the high-yield bond market frothy and high-yield default rates modest. According to Mariarosa Verde, managing director of credit market research for Fitch Ratings, 20.5 percent of the debt issued in the high-yield bond market last year was floated by companies with non-investment-grade ratings of C, CC, or CCC, the lowest ratings Fitch assigns for anything other than bonds that have already defaulted. By contrast, companies with such dire ratings accounted for only 10.1 percent of new high-yield issuance as recently as 2003. Still, with corporations able to feed at the bank-credit trough, high-yield default rates remain low. Verde says only 1.5 percent of the market defaulted in 2004, by volume, and only 3.1 percent in 2005, down from 16.4 percent as recently as 2002.

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