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.

Conclusion

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.