Here’s another big number for the global financial crisis: $4 trillion (Rs195 trillion). That’s the bill non-financial corporate borrowers face over the next two years as a chunk of their debts become due for repayment or refinancing, according to data from deal tracking firm Dealogic. In normal times, borrowers would roll the debts over with their lending banks, or maybe issue new bonds. But as financial firms cram down their bloated balance sheets, doing so is harder, where it’s possible at all.
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Those who borrow direct from banks will find there are simply fewer loans to go round. Banks are under pressure to shrink the asset side of their balance sheet, even as they are forced to bring off-balance sheet vehicles onto their books. The International Monetary Fund estimates that European and US banks alone will cut $10 trillion of assets over the next five years.
Speculative borrowers such as hedge funds, oligarchs and highly leveraged asset buyers get burned first. Anecdotal evidence, though, suggests ordinary, moderately leveraged corporates, too, are finding the door closed—notable those in wobbly consumer-facing sectors, or those who pushed too hard on terms when the going was good.
Where there is lending to be had, it will be more expensive. Some banks are calculating rates on new lending based on how much it costs to insure against the borrower defaulting. Borse Dubai Ltd, Nestle AG and Nokia Oyj have all taken out facilities linked to their credit default swap (CDS) price—an unattractive proposition, since CDS spreads are influenced not by companies themselves, but by the whims of the credit markets.
When banks say no, there’s always the bond market. Bonds were eschewed in recent years as borrowers sought the tight spreads and flexible repayment of syndicated bank loans. But they’re still not for everyone. First, bonds are expensive. Altria Group Inc., the US tobacco firm, just issued a $6 billion bond at a punishing 600 basis points above the rate on US treasurys. (One basis point is one-hundredth of a percentage point.) Second, issuing them is a name game. Fine if you’re a Nestle or an Altria, but harder for their smaller, less trusted cousins.
Not all borrowers will be equally crunched. The wider margins from more expensive lending will attract new entrants to the market. Some Japanese banks are reportedly stepping in—but they won’t be able to absorb the full amount. The result is that some businesses will fail. And others will need to take evasive action, such as cutting staff, stopping dividends, shutting branches or slashing costs and capital expenditure.
Less credit for speculators looks like a healthy correction. It’s not so healthy if otherwise viable companies go to the wall through a lack of lending. Keeping those lines of credit open should be high on world leaders’ agendas at the G-20 meet.