By Michelle Sierra
April 3 - 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.
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.
(This story will appear in the April 4 issue of IFR Magazine)
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