April 22, 2008
I need to correct my post from April 17, 2008 @ 10:50 a.m. I had written about the retraction of the lines of credit for Talbot's by 2 of their banks - HSBC and Bank of America. After talking to one of my bank contacts familiar with the particulars of this event, this is just Talbot's specific and not a new development in the global corporate lending market. Apparently Bank of America has been waiting for an excuse to put the hammer down on Talbot's and they got just that opportunity. HSBC for some unknown reason at this time decided to dog-pile them. But this event actually brings up something VERY relevant for all debtor companies (and this IS a new global corporate lending development). This is NOT the time that you want to go to your banking group to request an Amendment or an Extension.
The banks are taking this opportunity to "correct the pricing" (this is the verbiage that you gotta love) of deals. The banks are now taking the stance that the deals that were done, most likely pre-2006, were "not correct" in their pricing, fees and covenants. Forget that was the market-based, demand/supply environment which dictated the pricing. It was "incorrect". I wonder how this logic would go over in other forums, or let's just invert the positions? To any corporate debt holder, when the cycle sweeps back to a buyer-friendly cycle again (and these debt deals always swing back and forth as far as bank favorable or borrower favorable), try going to your bank and ask them to "correct" the erroneous pricing. Uh, huh. The only way the corporate borrower will get new pricing is to re-do the whole deal - which will cause a major "fee event" (also some great verbiage coined by lawyers involved in such deals because EVERYONE gets more fees - bankers, borrower lawyers, lender lawyers, accountants, Rating Agencies, etc...).
The banks that emerge from this mortgage-security induced debacle are going to be stronger than ever. Sure, I think that we'll lose some of the lesser banks - the good ones will get bought and merged, the bad ones may have a more ominous future. One of those banks that i do think will come out of this strong is JPM. The have both sides of the corporate capital markets, with top notch investment banking for equity deals and public/private debt deals and a tremendous banking side for Bank Lines of Credit and other traditional corporate banking products. And it also doesn't hurt them that they essentially have a government-backed deal for the purchase of Bear Stearns.