Via Financial Times

Struggling companies across Europe including Matalan, Travelodge and Heathrow airport have tapped their banks for €32bn of funds to help stay afloat through turbulence caused by coronavirus lockdowns.

Over the past four months, at least 104 companies that rank below investment grade have drawn down roughly €32.2bn from their loan facilities from global banks, according to data from 9Fin, a fintech data provider that has scraped the filings of European bond issuers. 

The true figure is likely to be much higher, given that publicly traded companies are not required to report drawdowns immediately and privately held groups often have no obligation to announce them.

“We’ve seen an unprecedented flight to liquidity, no one ever thought the whole market would draw their credit lines at once,” said Steven Hunter, chief executive of 9Fin. “It’s not just the breadth of the drawdowns across the market, it’s the depth which is striking,” he added, noting that most companies are drawing down almost all of their allotted facilities, even those that had never tapped them before.

Companies in the consumer discretionary sector — including retail, leisure and car companies — accounted for just under half of the €32bn in drawdowns 9Fin has tracked so far, although they make up only 18 per cent of the European high-yield market. Other cash-strapped companies that have turned to drawdowns include Pure Gym, travel company Tui and car manufacturer Fiat Chrysler.

Bar chart of Amount drawn down from revolving credit facilities (€) bn showing Consumer discretionary companies relying most heavily on drawdowns

During three weeks in March, as much of the world went into lockdown, more than 130 companies of all types in Europe and the Americas drew at least $124bn from their lenders, according to an analysis of public disclosures by the Financial Times.

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Before the coronavirus crisis, lenders offered low-cost revolving credit facilities to win new business from clients. Maxing out these credit facilities is supposed to be a last resort for companies at a time of distress, but with credit downgrades looming, they have come to be seen as the best option on the table.

Banks, which had assumed the stigma of drawing down would act as a deterrent, have been taken aback by the rush. Avenues for obtaining credit have been harder to come by for companies that rank below investment grade as corporate bond markets have become a reserve of the bigger, safer names. 

“It’s a mix of good precaution and desperate measure — closer to desperate measure for these high-yield companies,” said Aneesha Sherman, senior European retail analyst at Bernstein.

The retail sector, which is the third most distressed sector after oil and airlines, currently has a default rate of 10 per cent, compared with 4 per cent for the wider market.

Higher default rates have created a vicious cycle whereby banks are tightening up their credit facilities to protect against further defaults, giving risky companies few options but to draw down from their credit lines, said Ms Sherman. This in turn, creates more risk for banks later down the line.

“It’s not very promising; it’s going to be a significant headwind for banks,” said John Cronin, senior financials analyst at Goodbody. “It goes without saying, some of this will go bad and this is just the tip of the iceberg.”