Thursday, September 25, 2008

Corporations Adopt a Survivalist Approach -- by Tapping Credit Lines

Can you imagine if the consumer tried this at home? Times are tough. Credit is tight. The consumer thinks, aha!, I can tap all of my credit limits -- by taking cash advances. They could call it their rainy-day fund. That would definitely play well with their creditors. NOT. Let's just hope that the consumer at home doesn't think that what works for corporate America will work for them. It never does.

From the MarketBeat blog over at Corporations Adopt a Survivalist Approach

What’s happening now may be the corporate equivalent of buying 10-gallon containers of mayonnaise and gigantic drums of beans and wheat. The current strategy is one of cash-hoarding, as companies have elected to tap into credit lines on a “just in case” basis, while others suspend or pullback on dividends and stock-market buybacks.

Farther down in the blog entry, MarketBeat highlights a Wall Street Journal story out this morning, titled: U.S. Firms Gird for Hits and Draw On Credit Now

In that story, one particular passage caught my eye:

When a bank enters into a revolving credit line with a customer, whether it's a business or an individual, the amount of that loan commitment counts against the bank's capital ratios. That means that as companies draw down existing credit lines, it doesn't strain the bank's already-depleted capital levels.

The bigger impact is on a bank's liquidity. Bank treasurers are generally charged with gauging the likelihood that specific loans will be drawn down, and the expected demands that will place on the balance sheet. That in turn influences the bank's decisions about whether to make new loans to other borrowers.

The turn of the screw just made things a little tighter. I don't think we've seen anything yet.

Corporations are tapping these lines because they see storm clouds moving in. I'm wondering how long the consumer can continue to hold out.

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savemanatees said...

After 10 years on the Street liquidity means small businesses will be going belly-up PDQ as a vast majority depend on their lines of credit for working capital.

For the average consumer....plastic will be harder to get then black gold. At least two entire generations who have been raised on living in debt (the Great American way) their lives are going to change profoundly.

Cash (obscene word) will be the tender of choice. I will be very busy in the bk world. Many of those young traders losing their jobs have HUGE salaries. They also are personally highly leveraged. The RE mkt in NYC will start heading downwards quickly. Maybe a 1 bedroom/1 bath will fall below 1MM in Battery Park!

THe bailout will not kickstart right away....expect at least a 6 month lag, IMO. This will be caused by the implementation of new regs...sorely needed.

Credit Matters said...

Save, we're entering a new world. Wish I could see the future. I was telling one of my colleagues yesterday that I'm glad I am alive at this point in history.

We're certainly living during interesting times.

And regarding the 1br apartment in Battery Park, it will probably go to a "reasonable" $850K. Woot woot.

Anonymous said...

But consumers ARE doing just the same thing. Many homeowners have a home equity LINE of credit they may not have used yet. Hearing the news that many banks are slashing home equity lines they are drawing on the line and stashing the cash to have it on hand, rather than have the limit slashed out from under them.

Same thing.

Credit Matters said...

Anon, that's a good point. But banks have been clamping down on those lines -- reducing them before the debtor has a chance to tap the line.

But you're right. Consumers are doing that.

Clawed said...

What I can't stand anymore is the notion that companies can be "too big to fail" - if they are too big to fail they should be too big to exist.

Credit Matters said...

Clawed we've been hearing that term a lot lately, eh? Now JPMorgan is too large to fail.

Clawed said...

Did you see the House Republicans walked out and are not supporting the bailout plan? The market could have an interesting day tomorrow. And by interesting, I mean like a roller coaster.

Credit Matters said...

Geez, Clawed, this is getting interesting, no? Game of chicken? Should be an interesting Friday for sure.

Thanks for the heads up, pal.

Clawed said...

I expected this to happen, or something like it, since early this week.

This was something I read a couple of days ago:

Credit Matters said...

Clawed, thanks for the note. I will check out that story.

Credit Matters said...

Clawed, just read that piece. How prescient. Thanks for the link.

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