GM’s strategy shift shows how “cash is king” during the COVID-19 crisis

NEW YORK, April 28 (LPC) – General Motors Co’s (GM) decision to opt for a larger $16.5 billion credit facility just weeks since the coronavirus outbreak in the United States took a turn for the worse.

The automaker sought to extend the terms of $6 billion in revolving credit instead of refinancing a $16.5 billion credit facility after talks with its banking group during the height of the COVID-19 crisis.

“They knew they wouldn’t get any interest for the five years,” a bank source said, referring to the $10.5 billion the company left in place. “(The banks) had to tell them it wasn’t happening.”

Concerns about the impact of the virus on the economy have prompted companies in the US to start hoarding capital. Since March, companies like Heinz, Anheuser-Busch InBev and Petrobras have drawn down their normally unfunded lines of credit, often in full, to prepare to withstand the slowdown caused by the pandemic.

The inability of the banks to repay their liabilities with sufficient liquid funds is considered to be one of the main causes of the financial crisis. Liquidity is currently tight, advising issuers to exercise caution when it comes to extending existing multi-year working capital facilities. So is the additional liquidity, which is currently weighted between 1-year facilities and 18-month loans.

As of the first week of April, investment-grade issuers had structured 34 tranches totaling over $65.4 billion with maturities of less than five years, compared to 23 tranches totaling $50.4 billion with five-year structures, according to data from Refinitiv LPC.

“Any time the market is a bit unstable, people prefer to lend on shorter terms,” ​​said a second bank source. “And there’s so much uncertainty right now.”

GM originally went to its JP Morgan and Citigroup-led banking group in early March and asked to extend maturities on its $16.5 billion revolving credit facility.

The deal should extend maturities but leave prices unchanged, multiple sources familiar with the discussions said.

However, GM’s decision to refinance comes at a time when the company is facing a longer-than-expected shutdown of its plants and a significant drop in sales amid a crisis of exceptional proportions that has created a very different playing field from the last refinancing talks of the year 2019

To further complicate negotiations, the company decided to pull $16 billion on its turret on March 27 while refinancing talks with its banking group were taking place.

“To support liquidity and strengthen its financial position amid global market uncertainty from the coronavirus pandemic,” the company said on March 24 of its plans to draw on the facility.

The original proposed refinancing included a $2 billion 364-day loan and a $4 billion three-year loan. It also included a $10.5 billion five-year facility, multiple sources familiar with the original refinancing talks said.

The new plan only refinanced the short-term maturities, including the $2 billion loan, which was reduced to $1.95 billion, and the $4 billion three-year loan, the sources said.

GM’s plan change indicates three things: elevated prices in the market, a strong preference for shorter-term commitments and concerns about the auto sector, a third bank source said.

The spreading virus forced most of North America’s auto factories to close, at least temporarily. Ford, General Motors, Fiat Chrysler, Honda, Toyota, Nissan and Hyundai are all affected.

PRICING

The one-year loan pays 25bp undrawn while the three-year loan pays 40bp undrawn.

At full drawdown, the loans will pay 175 basis points above Libor, sources familiar with the transaction said.

An option to convert the one-year revolving credit to a term credit after one year from the current deal has been removed, the sources said.

GM’s 364-day loan was previously at 12.5 bps and undrawn, and the three-year loan was at 15 bps and undrawn. The margin drawn on the two facilities was 125 bp above Libor. The company offered 30 basis points to lenders who chose to roll over their existing holdings.

The new refinancing plan left the $10.5 billion credit facility in place. Prices for the five-year bonds remain unchanged at 125 basis points above Libor and 17.5 basis points without a drawing.

GM also has a $3 billion revolving credit facility that it originated in January 2019 when it refinanced the other three tranches. This loan increased the company’s borrowing capacity to $19.5 billion.

Citigroup and JP Morgan spokesmen declined to comment. A spokesman for GM did not respond to requests for comment. (Reporting by Michelle Sierra. Editing by Kristen Haunss.)

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