2020-04-04 IFR Magazine

88 International Financing Review April 4 2020

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GE requests shorter-dated credit to

appease lenders

„ US Banks wary of liquidity due to volatility

GENERAL ELECTRIC is asking its lenders to replace

US$20bn in revolving loans with a new debt

package that will come with a smaller size and

shorter maturities.

The new loans, which will be US$15bn, are

a testament to a changing bank landscape as

firms seek to get better compensated for the risk

they take to lend as volatility rattles markets.

A shorter commitment window of three

years bodes well for the banks lending to the

multinational conglomerate when liquidity is

golden.

JP Morgan, Citigroup, Bank of America, BNP

Paribas, Goldman Sachs and Morgan Stanley are

leading GE’s loans.

“During times of volatility, banks prefer to be

out with a three-year loan, and not a five-year

loan. A shorter-term maturity is going to be less

risky,” a banking source said.

The reduced revolving credit size was agreed

to at the onset of the discussions with banks and

before the coronavirus fears rattled markets.

“GE has divested a number of assets. The

loans are more in line with GE’s current size,” a

person close to the company said.

The shorter-dated loan, however, is also

better for banks as longer-term capital is more

expensive, especially for those institutions that

borrow overnight to fund themselves.

The Basel II and Basel III capital agreements

monitor the minimum capital that banks need

to hold as a cushion against insolvency. The

accords require banks to hold capital against the

funded and unfunded revolving credit lines they

provide to their corporate clients.

During times of uncertainty, unlike the bond

market that offers pre-payment penalties to

banks, lenders in the loan market prefer shorter-

dated commitments.

“The loan market wants to go shorter because

banks are very uncomfortable with their own

cost of liquidity,” a second banking source said.

Companies such as GENERAL MOTORS, FORD

and PETROBRAS have opted to hoard liquidity as

they borrowed from revolving credit lines that

they usually leave untapped.

According to JP Morgan, by March 27 there

had been US$227bn in revolver drawdowns. And

although liquidity is yet to be impacted, more

drawdowns are expected.

Banks’ inability to repay liabilities with

sufficiently liquid assets is considered to be a

large factor of the financial crisis.

SHORTER OPTION

To replace US$20bn in revolving loans set to

expire in 2021, GE was originally looking to do

a three-year and a five-year loan. But given the

uncertainty in the market, only shorter-dated

financing was available.

“As part of our normal financial management

process, we are refinancing a back-up credit

facility that expires in 2021. Our financial

position is sound, including US$20bn of cash

proceeds from closing the sale of BioPharma on

March 31,” a GE spokesperson said.

The financing, that launched early last week,

is expected to price above the existing loan.

GE is looking to pay 15bp undrawn and

137.5bp over Libor when the facility is drawn for a

three-year loan, the first banking source said.

GE originally paid 10bp undrawn on the five-

year and 9bp undrawn on the three-year portion.

“GE is obviously a company with a big bank

following and a big wallet, and they’re shrinking

the deal size so the expectation is that it will go

okay. Everyone is watching,” the second banking

source said.

With significant exposure to the energy

and transport sectors, lending to GE is now

a tougher ask for banks, the second banking

source said.

The company recently announced plans to lay

off 10% of its US workers at its aviation unit. GE

has also logged significant losses in its energy

division.

Michelle Sierra

9 IFR Loans 2327 p 75 - XX.indd 88 03 / 04 / 2020 19 : 26 : 36