Why Revolvers Matter

It’s been called the most mispriced security on Wall Street. It’s also the least-known casualty of bank regulatory reform. Welcome to the revolving credit facility.

For decades the workhorse of commercial financing, a revolving credit operates like a credit card supporting a corporate borrower’s receivables and inventory. It’s typically made available by commercial banks in the form of small undrawn facilities, usually between $2 and $10 million for mid-market borrowers.

Private equity-backed companies use RCs for similar purposes, including small acquisitions. No one paid much attention to them until recently. What’s changed? In three words: Leveraged Lending Guidelines.

Since regulators’ crack-down on “risky loans,” banks have been reducing their funded debt exposure to the most leveraged issuers. As that occurs, non-banks are stepping into the void, and are being asked by PE sponsors to provide the same undrawn capacity to borrowers that banks hitherto allocated effortlessly on their balance sheets.