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Crunch time for the corporates

In this period of shock ratings downgrades, weaker company balance sheets, increasing discrimination among credit investors and caution from lending banks, corporates are facing a liquidity crunch. One minute, banks are handing out revolving credit facilities without batting an eyelid and money-market investors are habitually turning over commercial paper, the next, relationship banks aren't quite so friendly any more. So what do corporates do when they are shoved out of selected CP markets and left scraping around to find short-term cash?

Michel Poirier

Those in any doubt about how quickly relationship banks can turn a cold shoulder on borrowers should learn from the fall of Enron. The US energy company, a top-10 Fortune 500 company, was a Baa1 credit sitting on top of world-class pipeline business in the traditionally stable utilities sector. Then in November, it was hit with a massive share price slump after a debacle over its off-balance sheet liabilities, failed to turn over its CP outstandings and was put on negative watch by credit rating agencies Moody's and Fitch. It did what any corporate in the same situation would do and turned to its banks, drawing down its existing $3.3 billion credit facility while arranging another $1 billion secured loan facility with JPMorgan Chase and Citigroup.

But not soon enough. After Enron was downgraded to one notch above junk status by Moody's and Standard&Poor's, bankers started demanding security over $3.3

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