Some companies are preemptively securing additional borrowing capacity to have on tap should the economy slide into recession.
Restaurant chain franchise Dine Brands Global Inc. and utility company Xcel Energy Inc. both recently increased revolving lines of credit in part to prepare for a slowdown, while aircraft maker Bombardier Inc. said a new credit facility could help it in the event of a downturn. High inflation readings that have recently eased only slightly and efforts by the Federal Reserve to cool prices by hiking interest rates have raised the prospect of a recession and job losses in the year ahead.
Companies can draw down revolving credit facilities to add cash to their balance sheets during an economic shock or periods of financial distress. Early in the pandemic, for instance, companies across industries leaned on their credit lines to build up cash reserves after lockdowns closed stores and offices.
Bankers describe the padded borrowing capacity as occurring only sporadically so far, but some large companies are moving in that direction. Dine Brands, for instance, which owns the Applebee’s and IHOP brands, in the last quarter increased the size of its borrowing capacity under its revolving credit facility by $100 million, to $325 million. Dine Brands pays an interest rate on the facility that equals 2.5% plus the term secured overnight funding rate. That is up from 2.15% plus the Eurodollar funding rate on its prior facility.
“It is just good to have that cash available in case something big and bad happens,” said Chief Financial Officer Vance Chang. The company, which has drawn down $100 million from the facility, could also use its credit line to invest in the business, he said.
Glendale, Calif.-based Dine Brands had $355.3 million in cash and equivalents on its balance sheet as of Sept. 30, up from $263.5 million during the previous quarter and $304.2 million a year earlier.
Companies typically use revolving lines of credit to fund daily cash or working capital needs. In addition to recession-planning, some companies are expanding their credit lines in response to higher input and inventory costs, corporate bankers said.
Globally, companies refinanced and extended $98.5 billion of revolving credit facilities this year as of Nov. 3, up 2% from the prior-year period, according to Dealogic, a financial data provider. The data set includes revolving facilities that were syndicated across a group of banks.
Some industries with higher working capital needs, including packaging and chemicals, have increased their credit lines from last year, said Vivek Bantwal, co-head of the global financing group within Goldman Sachs Group Inc.’s investment bank, commenting on lending by the New York-based bank.
Over the past four to six weeks, Wells Fargo & Co. has observed more clients taking out new term loans, which typically have lengths of five years, to pay down a chunk of their revolving lines of credit, said Kristin Lesher, head of middle-market banking. Companies are taking out new term loans to prepare for a possible recession, she explained.
Companies are saying “I’m going to use that to repay my revolver so that my most flexible piece of capital has more availability,” said Ms. Lesher, who declined to share the bank’s lending data.
She claims that there is little difference in interest rates between the two types of loans in the syndicated credit market. Banks, for their part, prefer to offer companies a term loan rather than increase their credit line because it generates higher returns, she said. Term loans, unlike credit lines, are also funded upfront.
The cash U.S. companies carry on their balance sheets has dipped over the past year as interest rates have increased, but still remains above prepandemic levels.
According to S&P Global Market Intelligence, cash and equivalents on the balance sheet fell 13% to $3.19 trillion among the 462 companies in the S&P 500 that had reported financial results as of Nov. 15. Among the same companies, cash holdings in 2019, the year before the pandemic began, were $2.19 trillion.
In September, energy company Xcel increased the size of its revolving credit facilities by 15%, to $3.55 billion. Minneapolis-based Xcel typically doesn’t draw on its facilities, but instead uses them as backup liquidity in case it can’t access the commercial-paper markets as occurred in the 2008 financial crisis, said Paul Johnson, the company’s treasurer.
The company increased its revolving credit lines primarily because it is expanding and also confronting higher commodity costs, Mr. Johnson said. But the murky economic outlook was also a factor, he said. “I think it’s appropriate to have additional liquidity during times of economic uncertainty,” he said.
According to Mr. Johnson, Xcel does not typically allow its commercial-paper balances to exceed 40% of its total borrowing capacity under its revolving credit lines. The company’s outstanding commercial-paper balance was $158 million as of September 30, with a weighted average interest rate of 3.4%. The company can borrow at the term secured overnight funding rate plus a margin of between 0.75% and 1.5% under its revolving credit facility.
Bombardier in the third quarter closed on a new $300 million, five-year revolving credit facility. The facility, which is secured by working capital collateral, will allow the Canadian aerospace company to keep less cash on hand in order to meet its target of $1.5 billion in available liquidity, according to Chief Financial Officer Bart Demosky on a Nov. 3 earnings call.
The aerospace company is also working to improve its free cash flow, which is one of several steps being taken to prepare it for the current uncertain economic environment, according to Éric Martel, the company’s CEO, during the conference call.
“We see a lot of varying predictions on what the coming months and year will bring when it comes to macroeconomic factors,” he said.