NEW YORK (BLOOMBERG) - Banks that have warned for years about the potential for shadow lenders to fuel a credit crunch are now rushing to them for help.
Investment bankers have unleashed a frenzy of phone calls across Wall Street as they try to drum up interest from credit-focused investment firms and hedge funds to provide tens of billions of dollars in financing to companies in industries upended by the coronavirus, according to people involved in the talks.
Household names such as Royal Caribbean Cruises and theater chain AMC Entertainment Holdings are on the hunt for more financing, according to people with knowledge of the matter. The cruise line already tapped existing credit facilities this month, unlocking access to US$600 million (S$846.6 million) in borrowings, but is seeking more, people said. AMC is looking at options for expanding its credit facility that could see some non-banks join the fray, other people said
A who's who of global securities firms has been working phones for potential deals - from US-based Citigroup and Bank of America to Barclays and Credit Suisse in Europe. Some have explored the possibility of arranging short-term financing for single borrowers as well as for broader industries, such as cruise operators, airlines and hotel chains, the people said, asking not to be named discussing confidential talks. One concept is to create portfolios of loans to be supported by groups of investors.
Though the discussions are in preliminary stages, they show that financial professionals are concerned that typically liquid financing sources such as bond markets - which have all but ground to a halt in recent weeks - may not step forward for weakened businesses even if they can survive the crisis. Already, worries about a credit crunch have prompted a roster of companies exposed to downturns in travel and oil prices to draw down standing credit lines with their banks.
Meanwhile, in the world of shadow banking, there are buyout firms and credit-focused money managers wielding substantial war chests and who could step in, potentially negotiating generous terms because of the market's stress.
"Every large private equity firm now has a credit arm, and this is a real opportunity for them to provide liquidity for companies in need," said Rajay Bagaria, president and chief investment officer of Wasserstein Debt Opportunities. "With people in quarantine, concerts and sporting events getting canceled, it doesn't take any imagination to recognize the economic impact occurring."
To be sure, the behind-the-scenes talks run the gamut. For some companies, banks are trying to arrange emergency financing. But they are also helping relatively strong clients bolster their liquidity merely as a precaution.
Representatives for Royal Caribbean, AMC, Citigroup, Bank of America, Barclays and Credit Suisse declined to comment on private conversations. Bankers said they have also been receiving calls from airlines around the world looking to shore up their funding until the virus clears.
It's not unusual for bankers to rope in alternative lenders for financing, but recent pitches have proposed unusual structures or terms. One money manager said his firm was approached about a secured term loan for a company in the food and beverage industry that would yield as much as 15 per cent, after factoring in the discount at which the debt would be sold.
Some money managers said they have heard from banks looking to reduce their own exposures, in some cases shopping longer-term loans they already underwrote. It's not necessarily unusual for banks to make such adjustments to their portfolios as market conditions change. And behind the scenes, bankers have been emphasizing that they remain open for business and lending as they field calls from the heads of relatively strong corporations wondering whether they should shore up their liquidity.
But most of all, discussions revolve around industries hit hardest.
In a sign of exceptional stress faced by cruise operators, for example, derivatives contracts tied to Royal Caribbean have charted a dramatic surge. The swaps protect against a default through December, and their move is a reflection of the increased premium now required to do so. The company's stock plunged 32 per cent on Thursday, its hardest fall since the terrorist attacks of September 2001. A spike in Carnival Corp's swaps also shows stress.