RCFs: Maxing out your credit is always very expensive
Revolvers could be the debt Achilles heel of cash-strapped corporates.
Ask any corporate what the defining feature of the onset of the Covid-19 crisis was for their business and the answer will be the same: shock at the speed with which all business activity – and therefore cashflow – halted.
Although concern about the virus had been growing in China since late 2019, many firms were blindsided when lockdowns started to hit Europe and the US in early March.
The sudden cessation of all cashflow is something that is just not supposed to happen.
“No equity valuation model could have seen this coming,” one investor points out in April. “Earnings over the coming year are always the biggest weight in any valuation model. What is happening now will necessitate ripping up all the models that we have and starting again.”
When a stop of this nature happens, the obvious first port of call for any corporate is its short-term working capital and revolving credit lines.