Saturday, March 28, 2020

A Run on Revolvers

You think this is about the run on firearms and ammunition.  Nope.

From ZeroHedge: "Revolver Run": Banks Suffer Record $200BN In Outflows As Frenzied Companies Draw Down Revolvers:

…as of last Friday, corporate borrowers worldwide, including Boeing, Hilton, Wynn, Kraft Heinz and literally thousands more, had drawn about $60 billion from revolving credit facilities this week in a frantic dash for cash as liquidity tightens.

For those unfamiliar with this term, think of a revolver like an open line of credit with a ceiling.  A company will have some permanent forms of financing in place (equity, long term debt, bond debt); it will also have a revolver from which it can draw (typically) temporary needs, for example, seasonal or inter-monthly fluctuations in working capital, etc.

Confirming the unprecedented revolver drawdown scramble of 2020, JPMorgan reports that its tracker of known corporates that have tapped banks for funding rose further to a record $208 billion on Thursday, up $15 billion from $193 billion on Wednesday and $112BN on Sunday.

Banks offer revolvers up to some limit – for example, a company could have a revolver of up to $5 million (or $5 billion); at any one time, none, some, or most of it might be drawn.  JPMorgan reports that revolvers are currently drawn, in aggregate, at something approaching 80% of their limit.

Why are companies doing this now?

As a result what was a revolver "bank run" has become a spring for the ages as virtually every company has rushed out to draw down its revolver for two reasons i) with the CP market still locked up, even blue chips have no access to short-term funding…

CP = commercial paper market; this market is still not functioning well, despite the Fed recently announcing a backstop for it.

…ii) increasingly more companies are concerned their banks may not survive…

This one is interesting.  If the bank doesn’t survive, money on deposit at the bank might be worse than having undrawn capacity on a revolver.  Money on deposit sits on the bank’s balance sheet; a depositor becomes nothing more than an unsecured creditor to a bankrupt institution (for any amount above the FDIC limits).

Meanwhile, the borrower will owe the balances drawn on the revolver to whatever institution has taken over the assets of the bankrupt bank – and these assets include loans made to companies who drew down their revolvers.

…so why not just draw down the facility and hold the cash instead of being subject to the whims of some fickle bank Treasurer who may not have a job tomorrow, or who decided to abrogate all revolver contracts with the blink of an eye…

This would be interesting: banks not meeting their commitments.  It is certainly possible, but if this happens in any substantial quantities, the banking system would be called into question just as if bank deposits were not made available.


I suspect that all of this can be papered over again by central banks, not forever, but for a time.  It will take central banks a few weeks or months to figure out how to handle this new normal, just as it took them some months the last time (2008-09).

Until consumers suffer unbearable price inflation, nothing prevents central bank balance sheets from growing to whatever number desired or necessary.  For the Fed, now at something around $5 trillion, $10 or $20 trillion can likely be had.

Prior to 2008, that number was something around $800 billion.


  1. Your question, "Why are companies doing this now?", is right on point. Why didn't they do this six months ago? Five years ago?

    Obviously, something has changed in the world of finance, which these companies are aware of and taking evasive action against it. What has changed?

    It is quite certain that all of us will find out shortly. Good luck and Godspeed on your own revolver drawdown! Oh, BTW, I just purchased a new clothes washer which should last for years and years. I paid for it with my own 'revolver', that is, a credit card, and which I will pay back when Uncle Donald sends me the $1200.00 as promised.

    My recommendation: Buy hard goods which you absolutely need or which you can use to generate future income. No speculation, no padding the bank account, no frivolous entertainment, no vacations. This has become a matter of personal survival.

    1. Roger, your comment raises the point that life will not return to normal for a long time, if ever. Once this "pandemic" is declared over, will we return with the same frequency to restaurants? Will we attend sporting events? Will we continue to work from home, for those for whom this is a reasonable option?

      Will we shun anyone who sneezes?

      And what do we do next flu season?

      This, of course, on top of the countless thousands of businesses that will never re-open.

    2. I suspect what they do in future flu seasons will involve some measure of restrictions applied unevenly to different areas. They will be more cautious about damaging economies, but choose measures for their impact on our daily lives to remind us who is in control. I know the US population has been subdued considerably over the last 100 years or so, but I would never have believed this near total submission would happen in my lifetime.

    3. On Thursday, March 26, I submitted a Letter to the Editor at a local paper which included this paragraph.

      "Normal? If what we had before was normal, then we are going to experience something far worse—major recession and even Greater Depression, widespread unemployment, hyper-inflation, the death of the US dollar, authoritarian and autocratic rule, martial law, chaos, destruction, wars, and a loss of life on a scale we’ve not seen before. Is that abnormal? It’s going to become the new normal and we’re going to learn how to live with it and, potentially, to die from it. When it’s over, everything about us as a people, society, culture, country, and world will be different. Completely different."

      Of course, this is only my opinion and I expect to receive pushback and ridicule, but I can find no good reason to believe anything else. Our style and standard of living are going to be transformed radically, not necessarily for the better.

      How it plays out remains to be seen, but those who are wise will take appropriate action, not so much to stymie the change, but to live through it and come out the other side in relatively good shape--without any guarantees that they will.

      This is where faith comes in. Have faith. We're going to need it.

  2. Those who read this blog already know that 1789, 1861, 1913, 1935, 1957, 1965, 1971, etc. were all harbingers of what was to come. The land of the free, the home of the brave has thrown away liberty with both hands. Peg

    1. Add 1812, 1846, 1941, 1963, and 2001 to the list. Just for starters.

    2. This morning my husband asked me what was 1957 for? I told him it was the year Atlas Shrugged was published. I know the list is inexhaustive, but that's why I put the etc. Smile, if you still can. Peg

  3. I had plans for that g'ment check but changed my mind twice. First was to buy more ammo and new weapon. Then, to give to 2 of my children that will benefit and need. But ...
    What if it is an advance on 2020, and/or 2021, tax return?
    Maybe I will cash it and keep it on hand for a year?

    1. Oh, Jaime, why are you planing ahead? You are ruining everything!