Who knew such a mundane topic as revolving credits could stir up such passions? Based on our TLL mail bag, readers have very definite opinions about how banks (and borrowers) are coping with the shifting regulatory climate related to these otherwise innocuous financing mechanisms.
As we discussed last week, the crack-down on “risky loans” has caused banks to cut back on their funded debt obligations to many highly leveraged borrowers. Less-regulated entities are rushing in to fill that vacuum. But a casualty of regulation is that unfunded obligations are being impacted as well. These are tougher shoes for non-banks to fill.
First, as one banker noted to us, even if funded leverage falls below the six times Ebitda mark set by regulators for a criticized loan, the guidelines state that unfunded RC availability must be included in the debt calculation as well.
Also throw into the mix any committed debt allowable under the credit agreement, including baskets and accordions. Regulators assume they are all drawn Day One, with no benefit to cash flow. As our friend wrote sadly, “It’s harder and harder to be a bank.”