Credit as Banks Free Up Capital By Michael J. Moore and Pierre Paulden Feb. 10 (Bloomberg) -- JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. are among lenders cutting back on $1.6 trillion of credit lines as they face increased demand for loans that threaten to drain capital. Banks used loan negotiations with retailers Rite Aid Corp. and Ethan Allen Interiors Inc., and with homebuilder Ryland Group Inc. in the past month to reduce credit limits and raise interest rates. After more than $1 trillion of writedowns and credit losses, lenders are moving to lessen the chance that troubled companies will withdraw funds. While President Barack Obama demands they extend more credit, banks are reluctant to do so until they know how much they’ll need to back with more funds, according to a Jan. 23 Citigroup research report. Companies may need to issue $450 billion of bonds to replace loans that won’t be renewed when they mature in the U.S. and Europe this year, the bank said. “For those companies unable to get credit, it’s economic Darwinism,” said Josh Rosner, a managing director at Graham Fisher & Co. In early 2007, he predicted mortgage bonds would spark a global financial crisis. “It’s a tightening of credit to rational standards.” New York-based JPMorgan and Citigroup are among lenders scaling back Rite Aid’s $650 million bank line by $200 million after the company tried to extend it last month. That prompted the Camp Hill, Pennsylvania-based drugstore chain to obtain a new $225 million term loan arranged by Citigroup with annual interest payments of 15 percent, Kimberly Noland, an analyst at Gimme Credit LLC in New York, wrote in a report on Feb. 4. Tightening Standards The old loan paid 1.25 percentage points more than the London interbank offered rate, a lending benchmark, according to a regulatory filing on Jan. 23. Karen Rugen, a Rite Aid spokeswoman, declined to comment beyond the filing. Banks can only shrink credit lines when a loan matures or a company needs to amend an agreement to avoid breaking the terms, unless the company volunteers. Over the past three months, 65 percent of domestic banks tightened standards on loans to large and mid-sized firms, the Federal Reserve said Feb. 2. U.S. lenders raised spreads on loans over their funding costs about 90 percent of the time, it said. Syndicated lending, where banks form a group to share the risk of dealing with a borrower, totals $11.8 billion this year in the U.S., compared with $132 billion in the same period in 2007, according to data compiled by Bloomberg. This year marked the slowest start in the U.S. since 1999, when Bloomberg records began. Charlotte, North Carolina-based Bank of America had $385 billion in lending commitments that hadn’t been borrowed as of Sept. 30, and JPMorgan had $248 billion, according to regulatory filings. Citigroup had $401 billion of so-called unfunded commitments to corporations and consumers, not including credit cards, according to a filing. ‘Give and Take’ The three banks were part of a group that arranged a five- year, $1.1 billion credit line for Calabasas, California-based Ryland in 2006. After reducing the loan as new home sales fell to a 17-year low, lenders last month cut the line by $350 million more to $200 million in exchange for changing net worth and debt requirements, Ryland said in a Jan. 27 regulatory filing. “It’s give and take,” said Drew Mackintosh, Ryland’s vice president for investor relations. “We wanted more room on the net-worth covenant and don’t necessarily need the capital right now.” JPMorgan decreased its share of the loan to $26.6 million from $73.3 million, and Bank of America’s declined $30.9 million to $17.6 million, according to the filing. Lenders led by JPMorgan cut Ethan Allen’s credit line in half to $100 million in exchange for relaxed terms on debt-to- earnings ratios. Unused Credit “We made the decision to reduce the amount of the line of credit because we have not drawn on it except to support letters of credit since its inception,” Ethan Allen Chairman Farooq Kathwari said in an e-mailed statement. “The reduced amount is appropriate.” Brian Marchiony, a spokesman at JPMorgan, and Danielle Romero-Apsilos of Citigroup declined to comment. “We continue to support our existing business lending relationships throughout the corporate, middle market, and business banking segments,” Bank of America said in an e-mailed statement. “Similarly, we continue to provide credit capital to prospective clients who meet our client selection criteria.” Revolving credit lines allow companies to borrow and pay back money whenever they need it. “Banks are asking companies, ‘Do you really need $50 million in unused revolver capacity?’” said Randy Schwimmer, managing director and head of capital markets at New York-based Churchill Financial Group LLC, a lender to mid-sized businesses. In Europe, companies are paying higher fees to lock in bank loans years before their current agreements expire, following a 45 percent decline in syndicated loans last year. Customers are proposing that banks agree to provide a new credit line when outstanding loans mature, offering one-time payments, higher fees and increased interest rates. Passing on Aid Obama might try to spur banks to expand lending in a rescue strategy Treasury Secretary Timothy Geithner may announce today. That would come in response to congressional criticism that firms receiving funds from the first $350 billion installment failed to pass on the aid. Cutting credit lines may free up capital that banks set aside to cover potential borrowing and allow them to make new loans. It also lowers the risk that struggling companies will take advantage of backup revolving lines of credit at rates agreed to before the credit crisis began in August 2007. General Motors Corp. and Ford Motor Co. led companies in drawing on at least $37 billion of the loans in the past year, according to Bloomberg data. On Jan. 29, Dearborn, Michigan-based Ford borrowed $10.1 billion from a revolving credit line with an interest rate 2.25 percentage points above Libor -- set yesterday at 1.23 percent. That compares with the 10.6 percent yield on the average high- risk, high-yield loan, according to Standard & Poor’s LCD. Textron’s Line Textron Inc., the maker of Cessna planes and Bell helicopters, drew down on $3 billion of credit lines last week because there wasn’t enough demand for its debt in the commercial-paper market, Doug Wilburne, vice president of investor relations, said at the Cowen & Co. Aerospace and Defense conference in New York on Feb. 5. He said the Providence, Rhode Island-based aircraft-maker is now paying 0.41 percentage point more than Libor, which amounts to $49.1 million annually on the loans. At the same time, banks seeking to protect that amount of Textron’s debt from default using derivatives would pay an upfront fee of $855 million and $150 million annually, according to Credit Derivatives Research LLC in Walnut Creek, California. Lower spreads on loans arranged before the credit crisis are limiting bank earnings, said David Goldman, the former head of fixed-income research at Bank of America and now a private investor. The net interest margin, which measures lending profitability, fell in 2008 to the lowest since records began in 1984, according to the Fed Bank of St. Louis. In the recessions of 1991 and 2001, the margin climbed as the central bank cut its target lending rate, Fed data show. No Relief “For the banks, this is unlike all other recessions because it hasn’t shown any relief in terms of net interest margin,” Goldman said. “The poor performance of net interest margin, which is a critical measure of bank profitability, is a stern warning to the banks that they have to take a much more old-fashioned approach to lending.” Companies paid an average of 8 to 10 basis points for access to untapped credit lines, Goldman said in an October report written for research firm Laffer Associates. A basis point is 0.01 percentage point. “They gave away these revolving credit deals like party favors,” Goldman said. “They should be changing those deals. If banks have to lend money at their own cost of funds, we’ll never get out of this mess.” To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net; Pierre Paulden in New York at ppaulden@bloomberg.net Last Updated: February 10, 2009 00:13 EST