How Much Can I Borrow on My Revolver?

We often tell our clients that a company does not file for bankruptcy on a particular day because it has too much leverage, or because it has a bad management team, or because it has a competitive disadvantage.  All of these factors may eventually drive a company out of business, but the reason a company files for bankruptcy on a particular day is liquidity: they run out of cash.  Therefore, it is important to measure a company’s liquidity as part of any comprehensive financial analysis (one of our favorite tools is the liquidity position). For many companies, availability under a committed, revolving line of credit is a key source of liquidity. Here’s an example: In 2010, Sears Canada entered into a five-year $800 million senior secured revolving credit facility.  As of January 28, 2012, they had borrowed $101 million under that facility.  How much additional can they borrow using that revolver? a) $699 million b) zero c) Something between $699 and zero The answer is … you don’t have enough information to give an answer.  According to Sears, they have $415 million available. Here are the factors that determine how much you can borrow on a revolver: How much you have already borrowed.  In the Sears example, it would reduce availability to $699 million Letter of Credit usage.  Many revolvers can also be used for letters of credit.  This allows companies to issue letters of credit without getting credit approval for each one individually.  However, letters of credit issued under a revolver reduce borrowing availability under that revolver.  In the Sears example, they had approximately $284 million of letters...

Top 10 Credit Topics of 2010

Here’s our list of the top 10 topics on the minds of credit professionals in 2010: 10) Risk Management – We’ve written many times this year about risk management, both good and bad.  Whether it was BP and operational risk, suppliers dealing with customer concentration risk (or “Wal-Mart Risk”), or Lehman just not managing risk.  This topic was on our radar in 2010 (and needs to stay there into 2011 and beyond). 9) Games CFOs Play – Aggressive financial reporting (and outright fraud) can happen at any time, but management’s motivation to do it is heightened during an economic downturn when there is pressure to “hit the numbers” (and not breach covenants, etc.). 8 ) Managing High Risk Clients – Sure the recession is over, but many companies are still struggling with high leverage, high competition, low sales growth, and high costs.  Lenders and bondholders will be working with many “high risk” clients well into 2011. 7) Intercreditor Priority – When times are good (think the 2003-07 credit bubble), no one pays much attention to collateral and subordination (or covenants, or any other part of credit documentation for that matter).  The restructurings and bankruptcies of the great recession reminded us how important these issues are.  We fear that the market is already starting to forget these lessons (think covenant lite and second lien!). 6) Cash Flow Analysis – Cash is king.  Real cash, not EBITDA.  Enough said. 5) Liquidity – Many CFOs (and lenders) have learned the hard way that liquidity can be the most important element of financial strategy.  Our favorite analytical tool for looking at liquidity is...

Why Isn’t Ford Bankrupt?

The Terrible Auto Market With the success of the GM IPO, we may be tempted to forget the terrible decade the U.S. auto industry has just completed.  Car sales steadily declined from 2000 through 2007, then collapsed in 2008 and 2009 to a level not seen since 1951.  Truck sales, which saw dramatic growth in the 1990s and finally eclipsed car sales in 1999, saw some growth in the early 2000s, but also dramatically retreated in the 2007-09 recession. The “big 3” U.S. auto makers also suffered market share declines in this period, from a combined 65% of the U.S. market in 2000, to 53% in 2006, to 44% in 2009.  It should be no surprise that GM and Chrysler filed for bankruptcy in 2009.  The real question is: Why didn’t Ford go bankrupt? Why Didn’t Ford Go Bankrupt? By 2006, it was clear to the big 3 auto makers that there was a problem.  Ford’s sales and net income had been flat for many years.  Ford, like the other auto makers, began a major restructuring to reduce capacity, cut costs, and accelerate product development.  The key to Ford’s success, however, was in aligning its business and financial strategies. How did the Ford finance team respond to declining sales and the company’s new operational restructuring?  By borrowing over $12 billion, increasing the company’s auto sector debt (excluding the financial services business) by 66% from $17.9 billion to $30.0 billion.  Ford borrowed this money at the peak of the credit bubble, right before the recession hit and vehicle sales dropped by over 1/3.  Why isn’t Ford bankrupt? Why the New...

Liquidity Position

There are lots of measures of liquidity. The classics are the current ratio and the quick ratio, but they’ve fallen out of favor because they don’t include cash flow, a critical component of liquidity. Cash burn is too recent to be classic, even though it’s been around for a while. But it’s limited to on-balance-sheet sources of liquidity. The liquidity position is the latest addition to the liquidity analysis toolkit. It has limitations, but we like it because it includes internal and external sources of funds. Here’s a short slide show about...