When times were sunny, banks promised scores of companies money for a rainy day. Now that day is here — and the banks, hard pressed themselves, are worried they will have to keep their promises.
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With the economy struggling, some corporations are starting to tap so-called revolving lines of credit and other forms of backstop financing. If others rush to do the same, the banks might have to lend hundreds of billions of dollars at a time their own finances are stretched, forcing them to raise money to cover the loans.
It is unlikely companies will reach for the emergency loans en masse, since such financing typically is used only as a last resort. Still, the worry is that the demand for cash might be greater than banks expect.
The potential exposure is enormous. Collectively, banks have pledged to lend companies more than $1 trillion. And because most of those loans have not been made yet, and many perhaps never will be, the banks have not accounted for them on their balance sheets.
“The fear here, of course, is what happens if they all hit on their revolver lines all at once?” said Neal Schweitzer, a senior vice president of Moody’s Investors Service, the ratings company. Banks might feel strained if they have to make even 20 percent of the loans they have promised.
Some companies have come calling already. In recent months Univision, Porsche, CIT Group and Sprint Nextel have for various reasons tapped lines of credit. A growing number of companies might soon follow suit, analysts say.
In recent years, when banks were flush, many lenders promised to extend credit to companies on easy terms in the future if the companies hired them to underwrite securities, advise on mergers or arrange other loans. And as they did for homeowners with weak credit, banks sometimes waived their usual lending rules for the corporate credit lines, making it harder for the banks to wiggle out of them.
Big banks like Citigroup, JPMorgan Chase and Bank of America have each promised hundreds of billions of dollars in credit lines to companies.
Bank of America alone had more than $400 billion of loan commitments outstanding at the end of last year, according to the company’s financial filings. Those figures excludes tens of billions of dollars in additional credit lines that the banks have promised consumers and homeowners.
A spokesman for Bank of America declined to comment beyond pointing to the bank’s first-quarter earnings, which listed its committed loans by industry. The bank has promised the most money to companies in the real estate, finance, retail and capital goods industries.
Even though the economy is struggling, Chad Leat, chairman of the alternative asset group at Citigroup, said few companies had tapped credit lines. A spokesman for JPMorgan said it was unlikely corporations would seek credit all at once.
“Even in the most volatile markets, including last summer, we have seen very few companies draw down their revolvers,” Mr. Leat said.
It is not unusual for companies to tap credit lines in tough economic times. Some turned to their credit lines last summer when the market for commercial paper, or short-term corporate I.O.U.’s, froze. But bankers consider it an insult — “an act of war,” as one put it recently — for companies to use revolving lines without good cause.
In February, bankers cried foul when Porsche, the German carmaker, tapped its revolving line to profit from interest rate moves in the market. Porsche said it was merely exercising its rights.
In general, banks are less equipped to make good on promised credit lines than they were only a year ago. Worldwide, the financial industry has suffered more than $300 billion of write-downs and credit losses over the last year.
Many banks hope to reduce, rather than to increase, some types of lending to safeguard their finances. Loans to companies with risky credit ratings are down 70 percent this year, according to Dealogic, a financial services research firm. About one-third of domestic banks surveyed in April by the Federal Reserve said they had tightened their commercial lending.
Some bankers say lenders are trying to dissuade companies from using some of their credit lines.
Geraud Charpin, the head of European credit strategy for UBS, said banks faced a quandary. While making loans is the bread and butter of banks, many of the revolving lines were negotiated before the credit crisis erupted last summer and carry relatively low interest rates that would be unprofitable for banks now.
At the end of last year, Mr. Charpin said, the banks were strongly discouraging customers from drawing on credit lines, as the banks feared their balance sheets could not withstand the additional strain.
“It’s annoying for them if companies are drawing on lines that were negotiated before the fall-over,” Mr. Charpin said. “But banks in general want to go back to the lending business. The last thing they want to do is anger good customers.”
In rare instances, lenders are trying to reduce companies’ credit lines or renegotiate the terms of the loans, particularly for companies that have fallen on hard times.
For instance, the Radian Group, a bond reinsurance company based in Philadelphia, recently worked out a new agreement with its banks that will enable the company to borrow money regardless of its credit rating. In exchange, Radian agreed to have its credit line reduced to $250 million, from $400 million.
Many company executives are reluctant to discuss credit lines publicly for fear of angering their bankers. But some say they are worried that banks will struggle to meet the growing demand for loans as companies reach for their credit lines.
“There’s a lot of people out there concerned that banks will not have the capacity to front all of their commitments if everybody drew them down,” said an executive at a large real estate investment trust.
