Capital Markets

Doom Seen for Multi-Year Utility Borrowing

Banks are pulling back on energy companies' credit facility renewals, shrinking their duration, and raising their prices, according to Moody's.
Sarah JohnsonJanuary 20, 2009

Banks have been siphoning favorable credit treatment out of energy companies, resulting in higher borrowing costs and stifled confidence among utilities in their ability to raise quick cash, according to Moody’s Investors Service. The rating agency predicts banks will continue to place more restrictions on energy companies’ credit lines as they renew revolvers.

In a new report, the firm says electric and gas companies’ credit facility renewals will be “significantly more challenging.” The new conditions will make it harder to draw down on the lending facilities, putting energy borrowers’ ratings at risk. Those companies needing to renew credit facilities that mature this year or in 2010 will especially feel the brunt of new credit constraints.

As a result, energy companies will need to look for alternative ways to supplement their working capital, such as through asset-backed financing, leasing, or vendor financing. “Too much conditionality could weaken the reliability of these credit facilities as an assured, reliable source of cash and liquidity support and for commercial paper backstop,” Moody’s says. In its ratings assessments, the agency considers a company’s revolver as a way to measure its liquidity, and thus its creditworthiness.

Banks’ extensions of credit facilities to the sector have significantly shrunk in the past six months. Lenders seem willing only to give utilities revolvers that last 364 days or less, presenting the possibility that “the day of the multi-year credit facility may be over, at least in the near term,” according to Moody’s researchers, who reviewed credit lines at 111 energy companies. Several utilities entered into five-year revolvers in 2006 and 2007.

The ratings firm takes a dim view of the new, shorter-term corporate borrowing facilities. “Shorter term facilities do not provide adequate protection against temporary financial market disruptions and are constantly subject to repricing and renewal risk,” the agency notes.

Besides shortening revolvers’ tenors, lenders are also using volatile pricing barometers and more restrictive covenants. In some cases, they are tying borrowing rates to credit-default-swap spreads. Further, the banks increasingly expect credit facilities, including those issued to investment-grade companies,to be secured.

After utilities go through the trouble of paying higher prices and meeting new credit terms, they may have a harder time tapping the lines. Banks are increasingly requiring corporate borrowers to report they have not had a “material advance change” on their business or financial condition before they can draw down. Moody’s views the so-called MAC clause as further hindering companies’ abilities to maintain liquidity.

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