NEW YORK, June 9 (LPC) – As immediate demands for cash from the Covid-19 crisis begin to flatten, banks, lending to top-rated companies, look to how they can keep business momentum going and simultaneously protect against higher financing costs and deteriorating credit risk.

The forward-looking approach is a delicate balance between developing new businesses and meeting customer needs while ensuring that the effects of another economic downturn are mitigated if the pandemic hits a second wave.

The banking market has been relieved of some pressure on lending capacity over the past month. Several investment-grade companies are repaying some of their pandemic-related liquidity facilities with the proceeds of corporate bond issues, such as Southwest Airlines and PayPal, both of which issued bonds last month and incurred part of the proceeds to repay credit facilities.

Yet lenders are aware that despite repayments, outstanding loans still exceed pre-pandemic levels. Despite their appetite for new money transactions, banks are grappling with the cost of holding large funded loans on their balance sheets.

“We are still funded a lot more than we were,” said a senior banker. In March and April, there was a deluge of withdrawals in response to the economic disruption of the pandemic. Then the companies asked for additional short-term facilities and modifications to existing agreements to help them get through the crisis.

Regardless of the rise in short-term liquidity demands and withdrawals, the capacity of prime lenders is strong amid a thinner pipeline of event finance. Until April of this year, the volume of investment grade loans is down 5% year on year.

“I think the balancing factor for the market is that there isn’t a lot of M&A funding. In a normal market, you would have bridge financing, so from a bank capacity point of view, whatever happened in the market was well absorbed, ”the banker said.

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Although the capacity has remained in place, vigilance of lenders regarding credit risk and portfolio quality is an ongoing priority.

“Many banks have provided support during the initial pandemic wave, stepping in to provide additional liquidity and help businesses get through the next few months,” said Dan Chapman, general manager of the loan and sales union at US Bancorp, adding that “lenders remain focused on extending credit to key relationships.

In May, companies like Fortune Brands, HP Inc, PepsiCo, General Motors Company (GM) and others signed 364-day revolving credit agreements, as previously reported by Refinitiv LPC. Even companies that had multi-year agreements decided to refinance themselves with short-term loans rather than five-year loans. In April, GM refinanced about $ 6 billion in short-term loans, including a $ 1.95 billion 364-day loan and a $ 4 billion three-year loan. A five-year US $ 10.5 billion facility has not been refinanced, as previously reported by Refinitiv LPC.

“Today, with many borrowers busy refinancing gunshots in the bond market, Grade I lenders are reluctant to go beyond 364 days due to the uncertainties of Covid-19,” Chapman said. .

In April, the five-year tenor market fell for the first time since the Great Financial Recession (2008), accounting for a 6% market share, according to data from Refinitiv LPC.

Chapman believes that the return to longer tenors will be gradual and that prices will remain high.

“I hear that three years is the new five years, and even three-year agreements are rare. The market is not yet ready to go back to what it was, ”he said.

According to a June 1 report by Fitch Ratings, the risk for US private issuers of becoming “fallen angels” or losing their investment grade rating remains high. So far, the downgraded debt of more than two dozen fallen angel issuers has approached $ 200 billion, according to the report. Since the start of the pandemic, another 29 transmitters have been downgraded to BBB-, just a cut above junk territory.

A second wave of downgrades due to worsening economic conditions could take downgraded sub-investment grade debt to $ 400 billion, according to Fitch.

Stricter terms, including minimum liquidity requirements for borrowers and higher prices, are being implemented as a safeguard during this uncertain time. Only time will tell if this is becoming the new reality for the investment grade market.

“Banks will continue to be cautious and respond to the needs of their customers,” the senior banker said. “Things have improved, but by no means got out of the woods. (Reporting by Daniela Guzman; Editing by Michelle Sierra and Kristen Haunss)

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