bonds vs. bank loans: drawing down your revolver

 

A number of transport companies announced this morning that they are drawing down their revolving likes of credit with banks.  What does this mean?

bonds vs. bank loans

Bonds are fixed income instruments sold to investors.  Although, like everything else in financial markets there are myriad variations, a plain-vanilla bond is a fixed term and a fixed interest rate borrowing.  Absent the issuer violating loan covenants, holders can only get their money back before redemption date by selling the bond to someone else.  And in recent years of low yields, strong covenants have been few and far between.

Bank loans are a different animal.  For one thing, the counterparty is a bank or group of banks.  Some bank loans are fixed-term, typically with covenants that have more teeth.  Revolving lines of credit, or revolvers, in contrast, are the corporate equivalent of credit cards.  Lines can be borrowed or repaid at will and are very often used for seasonal working capital needs.

The key difference in today’s world:  a bank credit committee periodically reviews the revolver lines to make sure they’re appropriate.  I’ve seen instances, though, where the bank calls an ad hoc credit committee meeting and yanks the line because of changing economic circumstances.

why this matters

This is what I’m reading in today’s news–transport companies are afraid their credit lines will be withdrawn and are grabbing the money before banks can act.

 

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