Why are selected companies increasing borrowing capacity under their lines of credit right now?

How do companies use revolving lines of credit?

Why are some companies taking out new term loans, despite recent higher interest rates?

Questions from reading WSJ-

Some companies are pre-emptively securing additional borrowing capacity to have on tap should the economy slide into recession.

Restaurant chain franchise Dine Brands Global Inc. and utility company Xcel Energy Inc. both recently increased revolving lines of credit in part to prepare for a slowdown, while aircraft maker Bombardier Inc. said a new credit facility could help it in the event of a downturn. High inflation readings that have recently eased only slightly and efforts by the Federal Reserve to cool prices by hiking interest rates have raised the prospect of a recession and job losses in the year ahead.

Companies can draw down revolving credit facilities to add cash to their balance sheets during an economic shock or periods of financial distress. Early in the pandemic, for instance, companies across industries leaned on their credit lines to build up cash reserves after lockdowns closed stores and offices.

Bankers describe the padded borrowing capacity as occurring only sporadically so far, but some large companies are moving in that direction. Dine Brands, for instance, which owns the Applebees and IHOP brands, in the last quarter increased the size of its borrowing capacity under its revolving credit facility by $100 million, to $325 million. Dine Brands pays an interest rate on the facility that equals 2.5% plus the term secured overnight funding rate. That is up from 2.15% plus the Eurodollar funding rate on its prior facility.

It is just good to have that cash available in case something big and bad happens, said Chief Financial Officer Vance Chang. The company, which has drawn down $100 million from the facility, could also use its credit line to invest in the business, he said.

Glendale, Calif.-based Dine Brands had $355.3 million in cash and equivalents on its balance sheet as of Sept. 30, up from $263.5 million during the previous quarter and $304.2 million a year earlier.

Companies typically use revolving lines of credit to fund daily cash or working capital needs. In addition to recession-planning, some companies are expanding their credit lines in response to higher input and inventory costs, corporate bankers said.

Globally, companies refinanced and extended $98.5 billion of revolving credit facilities this year as of Nov. 3, up 2% from the prior-year period, according to Dealogic, a financial data provider. The data set includes revolving facilities that were syndicated across a group of banks.

Some industries with higher working capital needs, including packaging and chemicals, have increased their credit lines from last year, said Vivek Bantwal, co-head of the global financing group within Goldman Sachs Group Inc.s investment bank, commenting on lending by the New York-based bank.

Over the past four to six weeks, Wells Fargo & Co. has observed more clients taking out new term loans, which typically have lengths of five years, to pay down a chunk of their revolving lines of credit, said Kristin Lesher, head of middle-market banking. Companies are taking on the new term loans with the goal of preparing for a possible recession, she said.

Companies are saying Im going to use that to repay my revolver so that my most flexible piece of capital has more availability, said Ms. Lesher, who declined to share the banks lending data.

There is minimal variation in interest rates between the two types of loans within the market for syndicated credits, she said. Banks, for their part, prefer to offer companies a term loan rather than increase their credit line because it generates higher returns, she said. Term loans are also funded at the outset, unlike credit lines.

The cash U.S. companies carry on their balance sheets has dipped over the past year as interest rates have increased, but still remains above prepandemic levels. Among the 462 companies in the S&P 500 that had reported financial results as of Nov. 15, cash and equivalents on the balance sheet declined 13% to $3.19 trillion, according to S&P Global Market Intelligence, a data provider. Among the same companies, cash holdings in 2019, the year before the pandemic began, were $2.19 trillion.

In September, energy company Xcel increased the size of its revolving credit facilities by 15%, to $3.55 billion. Minneapolis-based Xcel typically doesnt draw on its facilities, but instead uses them as backup liquidity in case it cant access the commercial-paper markets as occurred in the 2008 financial crisis, said Paul Johnson, the companys treasurer.

The company increased its revolving credit lines primarily because it is expanding and also confronting higher commodity costs, Mr. Johnson said. But the murky economic outlook was also a factor, he said. I think its appropriate to have additional liquidity during times of economic uncertainty, he said.

Xcel doesnt typically allow its commercial-paper balances to exceed 40% of its total borrowing capacity under its revolving credit lines, Mr. Johnson said. As of Sept. 30, the companys outstanding commercial-paper balance was $158 million, at a weighted average interest rate of 3.4%. Under its revolving credit facility, the company can borrow at the term secured overnight funding rate, plus a margin of between 0.75% and 1.5%.

Bombardier in the third quarter closed on a new $300 million, five-year revolving credit facility. Secured by working capital collateral, the facility will allow the Canadian aerospace company to keep less cash on hand to meet its target of $1.5 billion in available liquidity, said Chief Financial Officer Bart Demosky on a Nov. 3 earnings call.

The aerospace company is also taking steps to improve its free cash flow, one of a number of things to help ready it for the current uncertain economic environment, ric Martel, the companys chief executive, said on the call.

When it comes to macroeconomic factors, we see a lot of varying prediction on what the coming months and year will bring, he said.