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Exploit Revolving Credit

Written on the 1 June 2009 by by Jane Hodges

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 credit.

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. 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, 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.”

Caution: 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.

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Author: by Jane Hodges

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