Capital Markets

Credit Cost Hikes Know No Boundaries

Companies worldwide are hit with a smorgasbord of higher prices for revolving credit, long-term debt, commercial paper, and more.
Stephen TaubApril 4, 2008

The global stock markets may be showing some signs of life, but the credit markets are still in the doldrums.

A majority of companies in Asia, Europe, and the United States are paying higher prices for bank credit lines and long-term debt issues, and are being forced to accept tighter terms and covenant restrictions on loans, according to a new study. What’s more, many companies are trying to avoid seeking new funding altogether.

In February Greenwich Associates surveyed nearly 300 large companies to determine whether the staggering losses experienced by global banks would eventually begin to affect the amount of capital available to companies.

“Our research suggests that companies around the world are adjusting strategies in response to the credit crunch and preparing for a likely economic downturn, but they are certainly not panicked,” says Greenwich consultant John Colon. “Rather, they seem to be taking a series of necessary and logical steps toward preserving access to the capital they need to run their businesses.”

Greenwich asked the companies participating in the study to estimate the current fees and spreads they are paying on a variety of funding options and to comment on whether they have changed since the onset of the global credit crisis last year. The consultancy found that 60 percent to 65 percent of the companies said pricing for revolving credit facilities has increased since the collapse of the U.S. subprime-mortgage market last summer, and 65 percent to 70 percent said costs have risen on bank term loans as well.

More than 50 percent of companies said they are paying higher rates on commercial-paper programs. In addition, 70 percent said the cost of issuing long-term debt has increased, including more than a quarter that reported the cost has risen “significantly.”

The survey also found that about 60 percent of companies said it has become more expensive to issue asset-backed securities, and about 70 percent said costs associated with structured finance transactions have increased since the start of the global credit crisis. For example, U.S. companies estimated that commitment fees on revolving credit lines have increased 15 to 20 basis points since the start of the crisis, and spreads have widened 55 to 60 basis points. Term loan commitment fees appear to have increased roughly 25 basis points on average, while spreads have widened by more than 100 basis points.

In Europe, Europeans said, commitment fees on revolving credit facilities have increased by about 10 basis points on average, while spreads have widened by 20 to 25 basis points. Term loan commitment fees are up 5 to 10 basis points, and spreads on term loans have widened by 25 to 30 basis points.

The rising costs are also apparent in nonfinancial ways. According to Greenwich, nearly 55 percent of companies around the world say banks are imposing tighter terms and covenants on loans. Little surprise: banks are cracking down hardest on smaller companies and those with below-investment-grade credit ratings.

In the United States — which has the world’s most well developed noninvestment-grade credit market — 75 percent to 80 percent of companies rated BB or below say banks are tightening terms and covenants on loans, compared with 55 percent to 60 percent of companies with investment-grade credit ratings.

Meanwhile, many companies are trying to avoid borrowing under any circumstances. According to the survey, nearly 20 percent of companies are altering their funding strategies. In general, they are trying to avoid the need to raise new funding by taking a more active approach to managing cash flows. At the same time, they are trying to lock in and extend existing bank credit facilities while becoming more strategic in the management of their commercial-paper programs, Greenwich notes. In addition, some companies are looking to diversify their credit sources with such alternatives as receivables securitization, sale-leasebacks, or other options.