April 28, 2020 / 8:39 PM / a month ago

GM strategy shift shows how ‘liquidity is king’ during COVID-19 crisis

NEW YORK, April 28 (LPC) - General Motors Co’s (GM) decision to refinance short-terms loan maturities only, rather than a larger US$16.5bn credit facility, shows how much the market for lending to high-rated companies has changed in just a few weeks since the coronavirus outbreak took a turn for the worse in the US.

The carmaker sought to extend maturities on US$6bn in revolving loans rather than refinance a US$16.5bn credit facility following discussions with its bank group during the height of the COVID-19 crisis.

“They knew they wouldn’t get any interest in the five-year,” a banking source said, referring to the US$10.5bn that the company left in place. “(The banks) had to tell them it was not happening.”

Concerns about the impact of the virus on the economy has pushed companies in the US to pile on capital. Since March, corporations such as Heinz, Anheuser-Busch InBev and Petrobras have drawn down, often entirely, their usually unfunded credit lines as they brace themselves to withstand the slowdown brought on by the pandemic.

Banks’ inability to repay their liabilities with sufficiently liquid assets is considered to be a large cause of the financial crisis. Liquidity right now has tightened, and with it, issuers are being advised to sit tight when it comes to rolling existing multi-year working capital facilities. The same holds true for incremental liquidity, which is currently weighted toward one-year facilities and 18-month loans.

As of the first week of April, investment grade issuers had structured 34 tranches totaling over US$65.4bn with maturities of less than five years compared to 23 tranches totaling US$50.4bn with five-year structures, according to Refinitiv LPC data.

“Any time there is a bit of instability in the market, people prefer to lend shorter term,” a second banking source said. “And there is so much uncertainty right now.”

GM originally went out to its JP Morgan and Citigroup-led bank group in early March requesting to push maturities on the US$16.5bn in revolving credit facilities as part of its regular-way liability management operations.

The transaction was meant to roll over maturities, but leave pricing unchanged, several sources familiar with the discussions said.

But GM’s decision to refinance came at a time when the company is facing a longer than expected shutdown of its plants and considerable revenue losses amid a crisis of extraordinary magnitude that has created a playing field much different from when it last underwent refinancing discussions in 2019.

Complicating negotiations further, the company decided to draw down US$16bn on its revolver on March 27 while the refinancing talks with its bank group were taking place.

“To shore up liquidity and strengthen its financial position due to global market uncertainty from the coronavirus pandemic,” the company said on March 24 about its plans to draw down the facility.

The originally proposed refinancing included a US$2bn 364-day loan and a US$4bn three-year loan. It also included a US$10.5bn five-year facility, said several sources familiar with the original refinancing discussions.

The new plan has only refinanced the short-term maturities, including the US$2bn loan that has been reduced to US$1.95bn, and the US$4bn three-year loan, the sources said.

GM’s change of plans is indicative of three things: increased pricing in the market, strong preference for shorter-dated commitments and concerns about the auto sector, a third banking source said.

The spreading virus forced most of North America’s auto plants to close, at least temporarily. Ford, General Motors, Fiat Chrysler, Honda, Toyota, Nissan and Hyundai have all been impacted.

PRICING

The one-year loan pays 25bp undrawn, while the three-year loan pays 40bp undrawn.

When fully drawn, the loans pay 175bp over Libor, the sources familiar with the transaction said.

An option to convert the one-year revolving credit into a term loan after one year from the current deal has been removed, the sources said.

GM’s 364-day loan previously paid 12.5bp undrawn, the three-year paid 15bp undrawn. The drawn margin on the two facilities was 125bp over Libor. The company offered 30bp to lenders that chose to roll over their existing holdings.

The new refinancing plan left in place the US$10.5bn credit facility. Pricing on the five-year will stay unchanged at 125bp over Libor and 17.5bp undrawn.

GM also has a US$3bn revolving credit it entered into in January 2019 when it refinanced the other three tranches. That loan increased the company’s borrowing capacity to US$19.5bn.

Citigroup and JP Morgan spokespeople declined to comment. A spokesperson for GM did not return requests for comment. (Reporting by Michelle Sierra. Editing by Kristen Haunss.)

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