Back in the good ole days banks used to woo prime clients like Porsche with a
credit line. This was a commitment to hand over ( €10bn in this case) on demand …obviously with prearranged interest rates .
Astoundingly for the banks Porsche drew the whole lot down.
In case they needed it
Because they could ‘lend’ it out .
The upshot , according to this Bloomberg article , is that banks are suffering liquidity problems as a result ( on top of their other liquidity problems)
bloomberg.com/apps/news?pid= … refer=home
Banks had more than $1.4 trillion in untapped loan commitments as of September, the most since data became available in 1989, according to the Shared National Credit survey by four U.S. regulators including the Federal Reserve and Office of the Comptroller of the Currency.
New York-based Citigroup had $471 billion at yearend, more than any other U.S. bank, according to regulatory filings. Charlotte, North Carolina-based Bank of America disclosed $406 billion of undrawn loan agreements and New York-based JPMorgan had $251 billion. Merrill Lynch & Co. had $59.3 billion.
The banks’ Tier 1 capital, which includes common stock, retained earnings and perpetual stock, shows why any further drain may ``severely’’ limit new lending, said Credit Suisse analysts led by Ira Jersey.
The median Tier 1 level at the 10 biggest U.S. banks fell to 7.3 percent of risk-weighted assets at the end of 2007, from 8.7 percent a year earlier, according to the analysts. The ratio hasn’t been as low since the Zurich-based bank began tracking in 1990. The minimum for a ``well-capitalized’’ rating from regulators is 6 percent. The assets are calculated by weighing each type relative to its chance of default.
Very handy income seeing as bankers won’t be buying too many Porcshes for the next while !
ft.com/cms/s/0/13b12528-e03e … fd2ac.html
Published: February 21 2008 02:00 | Last updated: February 21 2008 02:00
Porsche showed it has as much financial opportunism as the bankers who buy its sports cars yesterday when it drew down a €10bn (£7.6bn) credit line to put it in low-risk investments.
The credit line was originally granted to the German carmaker to fund a takeover approach for Volkswagen on terms that reflected a more favourable time in credit markets. Like a sharp-eyed arbitrageur, Porsche spotted that returns from low-risk investments were now higher than the costs of borrowing the money.
“The amount borrowed will be invested free of risk at favourable interest rates and will bring in additional profit for Porsche,” it said.
The move could spell trouble for banks if other companies draw down on similar credit lines, some analysts say, because they already face significant constraints on their balance sheets and the availability of funds. Also, most credit lines have covenants that restrict their use.
One London-based analystsaid: "This has to be a worrying thing for the banks involved.
“If others are also doing this it will be adding an extra strain to banks’ balance sheets, on top of which you’d have to ask, ‘does Porsche know what it is doing with the investments it’s going to make?’”
Porsche declined to comment on how it would invest the proceeds of the loan. Originally, €35bn in credit was provided by a consortium of ABN Amro, Barclays Capital, Merrill Lynch, UBS and Commerzbank to finance a complete takeover of Volkswagen but Porsche deliberately made a low-ball offer designed to fail. However, it kept open the €10bn credit line to help it finance lifting its stake in VW from 31 per cent to more than 50 per cent.
Kerry Group alone had over Half a Bn of lines in place , in 2005
They , along with the top 10 non financial companies on the ISE , have about €2bn of Committed Credit Lines in place mainly from our banks
These will not expire until say 2010 on average , nor will the self same banks be minded to renew them on easy terms in 2010 .
***For no reason whatsoever other than the exemplary clarity of the explanation given *** I enclose a snippet from the last Kingspan annual report .
At 31st December 2006 the Group had total facilities
of e537 million, comprising syndicated bank
facilities of e300 million, e151.5 million loan notes
and e85.5 million of overdraft and other facilities.
The syndicated facilities include a e75 million term
loan with repayments of e25 million per annum to
16th December 2009 and a e225 million revolving
credit which will also mature at that date. The
Group’s private placement of US$200.0 million
(e151.5 million) loan notes matures in March 2015
(US$158.0 million) and March 2017 (US$42.0
The drawn down bank facilities and loan notes at
31st December 2006 were e232.5 million,
comprising e186.6 million EUR debt, e44.6
million of STG debt and e1.3 million of other debt.
The loan notes which represent 65% of the drawn
down facilities are fixed out to maturity in Euro
terms at 4.15%. The remainder of the drawn down
facilities are subject to floating rates.
Currently the Group does not enter into any external
hedges to limit the exposure on translating non-Euro
Looks like some one in Porsche is earning their money
mm I’m suspicious as to what these “low risk investments are”. There have been plenty of examples in the past of non financial companies who thought they were investing geniuses and lost badly.
Orange County was the classic example
The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy, from which it emerged in June 1995. The county lost about $1.6 billion through derivatives trading. Orange County was neither bankrupt nor insolvent at the time; however, because of the strategy the county employed it was unable to generate the cash flows needed to maintain services. Orange County is a good example of what happens when derivatives are used incorrectly and positions liquidated in an unplanned manner; had they not liquidated they would not have lost any money as their positions rebounded.