Last Updated Aug 2, 2010 2:22 PM EDT
The scenario: A company is in a stable position to
acquire or grow, but capital is hard to come by as banks tighten their lines of
The tactic: Pull cash from a revolving line of credit
— if you’re lucky enough to get one — so you’ll
be ready when opportunity knocks.
Among the many types of lending available to companies is
the so-called credit “revolver” — the corporate
equivalent of a consumer’s revolving line of credit. Viewed as a
rainy-day fund, revolvers can sit untapped for long periods, much like a
consumer’s unused credit cards, and they tend to have lower rates
than standard-term loans. But with the epidemic of recent bank failures and
liquidity in lock-down mode, some companies are pulling more cash from their revolvers
for fear that lenders will run into further trouble.
Drawing on revolvers may seem at first like a defensive
tactic, but having cash on hand means a company is ready to pounce on competitive
opportunities that might arise. href="http://resources.bnet.com/topic/Goodyear+Tire+%2526+Rubber+Co..html">Goodyear Tire and Rubber Co., for
instance, announced in September that it would withdraw $600 million from its
revolving credit lines because it couldn’t tap the $360 million in cash
it had placed in a fund that was temporarily unavailable. The company stated
that it would use the money for seasonal working capital needs and to “enhance
the company’s cash liquidity position.” Similarly, href="http://resources.bnet.com/topic/American+Electric+Power+Co.+Inc..html">American Electric Power disclosed in an October SEC filing that it had borrowed $1.4 billion from
credit lines to increase its cash position during disruptions in the debt
markets. As the filing explained, “The borrowings provide AEP
flexibility and will act as a bridge until the capital markets improve.”
Companies have credit ratings, and maxing out too much debt to handle
day-to-day business expenses can be regarded as a sign of poor fiscal health.
Rates on revolvers are climbing, too. And because credit revolvers are offered
as a kind of back-up for companies — and many companies are drawing
on them right now — banks and corporate lenders may seek ways to
limit their exposure to credit draw-downs in the future, or may offer less
money in revolving accounts. Revolvers must be renewed periodically, and banks
and lenders may opt against re-upping a revolver or may reduce credit limits.