Tag: Revolvers

Scary headline – Blackstone, others, tell portfolio companies to draw down revolvers

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Boeing announced it would draw down its revolver (see what that means here), we are now hearing that major private equity firms are telling their portfolio companies to fully draw down on their revolvers.

It isn’t just Blackstone, it also is Carlyle, KKR and HIG. Why is this a scary headline for banks? These firms are huge and are likely invested in hundreds of companies each of varying size. I understand why a company would draw down revolvers now — it improves liquidity.

But so many at once it makes banks put capital to work all at once… banks typically need to have capital on the sidelines in case of very severe outcomes. You can’t predict everything, so when all these companies are drawing down on revolvers at the same time, it reduces capital available for other borrowers who need it.

This is similar to a run on a bank, except in this case it isn’t deposits trying to exit, its borrowers calling their capital.

All that being said, banks are extremely well capitalized this go around vs. 2008. And they must undergo significant stress testing. I think banks will be OK through this, but it shows how a virus can spread into something even more viral and squeeze the financial system.

JP Morgan put out this slide detailing that its CET1 ratio (i.e. the ratio meant to provide a backstop for banks headed into a recession) is still well above the minimum 4.5% level. This was after the massive loan loss provision they took, along with others.

Here’s a chart I found laying out the banks with the most comfort, little dated, but still shows solid cushion headed into this:

Statistic: Common equity tier 1 capital (CET1) ratio of selected large financial institutions in the United States in 2019 | Statista
Find more statistics at Statista

You could also see the Fed and ECB backstop the banks in funding more corporate loans or even lower the reserve requirement to stimulate loan growth.