Corporate borrowers just aren't taking out their checkbooks the way they used to.
Revolving credit activity through March 31 hit its lowest quarterly point in two years. Globally, 1,026 facilities were completed for a total of $348 billion, according to Dealogic. That was the lowest quarterly level since 894 facilities were completed in the first quarter of 2010.
The combined value of first-quarter deals fell 45% from $630.1 billion in the fourth quarter. That was the highest linked-quarter drop on record, Dealogic said.
The decline is further evidence that some issuers are junking loans in favor of bonds, as large amounts of money added to high-yield funds drives down the cost of alternative financing.
Banks make money in two ways on revolving credit lines. Borrowers pay a commitment fee for the privilege, said Craig Mills, a partner at Nixon Peabody and chair of the law firm's global finance practice group. Those fees are ongoing. Banks also typically charge an arrangement fee for their cost of putting a facility in place.
Revolvers, which allow a company to repay and reborrow over the life of the loan, are one of the cheapest forms of debt available to corporations. Still, the relative cost of high-yield debt has been coming down, making it more appealing for borrowers to diversify their sources of funding.
A revolving line of credit is "like a checkbook for a company," Mills said. "It's a very flexible financial product, but that means there's also a related cost."
Revolving credit activity by subinvestment-grade companies is also on the decline, with 386 deals completed in the first quarter for a total of $89.1 billion, the lowest level since the third quarter of 2010.
Dealogic said the Americas accounted for 69% of revolving credit volume in the first quarter, with $235.2 billion via 585 deals, though this was down 42% from the $403.5 billion via 822 deals during the previous quarter.
Very often there will be two sub-facilities-a swingline facility, usually provided by the lead bank, which is for very short-term borrowing, such as a few days, and a letter of credit facility, also provided by the lead bank.
Especially if the borrower is subinvestment grade, a revolver will be secured with term debt.
Sometimes the collateral for a revolver is the current assets of a company, such as accounts receivable and inventory, on a first-lien basis. The revolver lenders might have a second lien on all the other assets of company. Sometimes the opposite is true: a first lien on noncurrent assets and a second lien on current assets.
"Without question, the treasurers and [chief financial officers] of companies are looking at the menu of options available to them," Mills said. "They look at the overall cost of money and, as would any consumer, they will often go where the money is cheapest. But it's easy to overstate that. Sophisticated companies want to have strong relationships with banks, but they frequently finance activities in the commercial paper market [and] sometimes they issue high-yield debt. They don't want to place all of their eggs in one basket."
In one of the biggest transactions of the first quarter, on March 15, Ford Motor extended the maturity of a $9 billion facility, to Nov. 30, 2015 from Nov. 30, 2013. JPMorgan Chase (JPM) served as administrative agent.
In addition to extending the maturity, Ford's lenders also agreed to release the collateral pledged under the facility when the car maker's senior long-term, unsecured debt receives investment-grade ratings from at least two of the three major rating agencies.
Bank of America's (BAC) Merrill Lynch unit led the first quarter 2012 bookrunner ranking for revolving facilities with a 13.3% market share, followed by JPMorgan and Citigroup (NYSE: C) with 13.4% and 8.3%, respectively.