Blackstone, Carlyle Urge Portfolio Companies to Tap Credit
Comment of the Day

March 12 2020

Commentary by Eoin Treacy

Blackstone, Carlyle Urge Portfolio Companies to Tap Credit

This article by Sridhar Natarajan and Heather Perlberg for Bloomberg may be of interest to subscribers. Here is a section:

The moves -- along with similar plans by Hilton Worldwide Holdings Inc., Wynn Resorts Ltd. and Boeing Co.-- are signs of the uncertainty coursing through corporate America as a global pandemic, a price war in oil markets and other problems threaten to tip the U.S. economy into a recession. A sudden and sustained increase in companies tapping credit lines could eventually strain banks if conditions become so dire that borrowers won’t be able to meet their obligations.

Lenders offer revolving credit lines to strengthen relationships with companies and don’t typically intend for them to be drawn upon en masse. In normal times, revolvers serve as the corporate equivalent of credit cards, giving companies room to borrow as needed and repay when shortfalls ease. Under normal
circumstances, the lines are seldom maxed out. Extensive use can be seen as a harbinger of distress.

Oil and natural gas companies can come under particular funding stress when prices fall. That’s because their credit lines are periodically updated based on market prices, potentially motivating companies to tap them early.

Blackstone’s private equity operation is the firm’s largest business by assets, at $183 billion. Energy accounts for almost 10% of the total portfolio, the New York-based company said in October. Rival private equity firms also are weighing similar actions, according to executives at two of them.

“From an economic perspective, the virus has created dislocation in the market and fear among the people,” Blackstone co-founder Stephen Schwarzman said in an interview in Mumbai last week. “Once that starts, one has to find the impact of negative consequences.”

Eoin Treacy's view

Sequoia kicked off efforts to lock down funding last week with its memo to partner companies and other private equity companies are following suit this week. Additionally, large companies with potential cashflow issues are also drawing down on credit lines. That is putting strain on banking balance sheets as they attempt to deal with the cut to interest margins and the potential clients will have solvency issues.

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