These days, short-term credit lines are the financing of choice for bankers and corporate America's chief financial officers.

But short-term debt carries its own set of risks for borrowers and banks alike. Borrowers shaken by unforeseen events-a strike, higher costs, stiffening competition, or a sinking stock price-may find short-term credit lines very costly to roll over, if they can do it at all.

And borrowers who draw on the lines may find themselves quickly in default because of rigorous repayment terms.

"The issue is when you get the lower-investment-grade borrower," said Robert Patterson, head of syndicated lending at Bank One Corp. in Chicago. "When a credit deteriorates you can force people into a workout mode."

Just ask Patriot American Hospitality Inc. When the Dallas real estate investment trust got caught in a cash crunch at the end of 1998, it became saddled under, among other things, a short and demanding repayment schedule required by its loan agreement.

In 1998, Patriot drew heavily on its $2.7 billion credit facility. Under the terms, Patriot owed $350 million on Jan. 31. Another $400 million was to come due at the end of March. In all, the repayment schedule called for Patriot to repay $1.3 billion in 1999 to a bank group led by Chase Manhattan Corp.

"They got caught in a liquidity trap," said Greg Zappan, a debt analyst with Standard & Poor's. "You like to see companies finance with a balance of short- and long-term debt. You don't want to see someone finance with all bank debt, and that's what Patriot was trying to do."

Granted an extension by creditors, Patriot solicited outside investors to pump $1 billion of new cash into the company, effectively relinquishing majority control of the REIT.

"If you asked the management of Patriot, 'What would you have done differently?' they would have to say, 'Go with long-term rather than short- term debt,'" said one veteran syndicated lender.

For banks, the risk is just as big. Since 1988 the Federal Reserve has required banks to set aside 4% of any loan maturing in a year or more against future borrowing. But the Fed does not require lenders to set aside capital for undrawn credit lines maturing in less than a year.

That means that banks can put that capital toward better-returning loans or investments-until the borrower decides to use the credit line.

And that's when things can unravel.

"Then you have to commit the full regulatory capital of 8%," said one banker. "The banks hate that. The returns on these credit lines are so small it drives their returns negative."

In the past, those risks were offset by the fact that 364-day loans were a relatively small part of a bank's loan business. Historically, the loans were made mostly to top-line investment-grade companies in limited situations.

But as Bank One's Mr. Patterson observed, in recent years, banks have become far more willing to lend to lower-investment-grade borrowers, and less interested in being locked into long-term loans with thin returns.

Borrowers, wooed by the low costs of short-term financing, took out $299 billion in credit lines that matured in less than a year in 1998, more than three times the $84 billion in short-term financing extended in 1995, according to Securities Data Co.

Andrew Hensel, a loan analyst with BankAmerica Corp. in Chicago, said that borrowers-at the urging of lenders-have moved away from long-term financing because of the cost. Borrowers are sitting on their long-term loans, mostly five-year deals made in 1996 and 1997, waiting for pricing to come down.

"The price for a long-term deal is 10% to 100% more than it was a few years ago," Mr. Hensel said. "The numbers are staggering."

Not everyone agrees that the risk posed by undrawn credit lines to banks is excessive. "Why should you set aside money on a promise?" asks Lawrence J. White, a professor at New York University and a former thrift regulator.

Banks, he said, have healthy capital in reserve to offset a run on credit lines. Even if those lines are drawn at 20%-for instance, in the event of a computer glitch in 2000-banks probably wouldn't have to sell assets.

"That's an extreme scenario," Mr. White said. "There's a real surplus position at banks at the moment. It's hard to believe that these lines are such an important part of all."

Bankers also point to new pricing techniques that make it less of a problem when borrowers draw their credit lines. In many cases, new credit lines have fees that rise as the borrower uses more money.

Not all the changes have been risk-averse. Many lenders grant options to borrowers that allow for automatic extensions to 364-day facilities. In some cases, these loans can be extended for as long as three years at the borrowers' whim. Banks, however, and the Fed still treat them as short-term loans.

Michael C. Mauer, managing director and head of syndicated lending at J.P. Morgan & Co., concedes that 364-day loans are "capital friendly" to banks. But, he added, many banks have begun to set aside some capital against those loans as that financing becomes more popular.

Mr. Mauer said he does not believe that borrowers are betting too much on short-term credit lines. "There is some risk there, but borrowers at that level have access to other capital markets. It's about price, not access."

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