Given the choice between bank lines of credit and the bounty of the capital markets, Corning Inc. treasurer Mark Rogus is increasingly thinking he would prefer the latter.
With so many hoops to jump through for lending commitments that might not be there when they are needed most, it might be wise to "rely less on the banking structure … and not go through the effort" of obtaining unfunded bank credit lines, Rogus said last month at a public hearing on government efforts to stabilize commercial lending markets. "It's not clear to me," he said, "that credit lines for large, multinational corporates will continue to serve a purpose in the future."
A world without bank credit lines?
Unlikely, analysts say. Even the most creditworthy borrowers, those with the best hopes of having unfettered access to the capital markets — or enough discipline to hold on to the proceeds — need bank lines if for no other purpose than to back up their commercial paper programs.
But if Rogus' comments reflect a provocative, pie-in-the-sky vision of a company treasurer's utopia, they also demonstrate widely shared frustrations that corporate borrowers have regarding their banks.
The financial crisis has brought long-simmering tensions between banks and large borrowers to a rapid boil. Some customers were stung by bad investments sold to them by banks, and others are aghast at the thicket of counterparty risk issues that the crisis brought to the fore.
"There has been less and less professional trust, which is a long-term trend, and now you have the professional judgment that the banks don't even know how to run their own businesses," said corporate consultant Jeff Wallace, the managing partner of Greenwich Treasury Advisors in Boulder, Colo.
Even more painful, at least from the borrowers' perspective, are the new strings attached to bank credit commitments. "The covenants are a lot more onerous, and the money is bloody expensive," Wallace said. "Negotiations take longer, you have to search to get more banks into the syndicates than before, and you end up providing a bigger book describing your business for the credit committees to make decisions."
Under these conditions, the capital markets look even more appealing to treasurers who already had been gravitating toward them in the years leading up to the crisis.
"You're going to see a lot more companies that go to the capital markets, where there is some certainty compared to the unreliability of their banking relationship," said Robert Clarke, a senior partner at Bracewell & Giuliani LLP and a former comptroller of the currency. "They may be taking on more debt than they need, but at least they don't have to worry about the lender saying they can't lend any more money. But it relies on the capital markets' getting back to functioning again."
And therein lies the rub for borrowers who, given the chance, might relish the idea of dumping their banks. As the current crisis has shown, capital markets are not a perfect substitute for liquidity. In times of stress, the markets may not be accommodating, and in boom times, companies that overfund themselves opportunistically may be tempted to put the capital to work instead of saving it for a rainy day.
The dramatic pullback by nonbank finance companies has further shrunk the alternatives to bank lines of credit. But the lack of options could wind up being a positive — and not just for banks.
When a crisis sparks a flight to quality, borrowers would be hard-pressed to find a more reliable source of funding, said Amir Sufi, a finance professor at the University of Chicago's Booth School of Business. For it is precisely the moment when capital markets close up that banks usually see an influx of deposits, kick-starting a cycle in which fresh deposits let banks turn around and open the lending spigot for companies drawing down their credit lines.
"History shows that most financial crises hit the corporate sector first, and the financial sector offers a buffer to that shock," Sufi said. "This time was different, but even in this crisis I don't think I've heard too many anecdotes of investment-grade firms having their lines of credit pulled arbitrarily."
Of course, that has not prevented banks from losing face with customers. Rogus also told a congressional oversight panel about a Corning joint venture's $1 billion investment in auction-rate securities, revisiting a topic that landed banks in hot water with customers and regulators last summer. On the bright side for banks, they may still seem downright lovable next to treasurers' other options.
Lenders such as hedge funds and mezzanine finance firms "don't have the other businesses — deposits, cash management or foreign exchange, for example — that allow banks to be more cooperative in bad times," said James Simpson, the managing partner of Corporate Finance Solutions LLC, a Stamford, Conn., consulting firm for middle-market companies. "If you think banks are a pain, deal with these guys."