This is interesting. After Goldman Sachs declined extending credit to GE Co, now J.P. Morgan is pulling back from providing standby credit lines, not just to GE, but in general. As John Lonski, chief economist at Moody's Investors Service, says below: "To some degree, this discourages companies from building up inventories or increasing capital spending." You may want to combine this with Fred Moseley's article at Monthly Review:
http://www.monthlyreview.org/0402moseley.htm Sabri +++++++ Top Financial News 04/29 14:31 J.P. Morgan Pulling Back From Providing Standby Credit Lines By Michael Nol and Mark Lake New York, April 29 (Bloomberg) -- J.P. Morgan Chase & Co. is retreating from a business that once made an easy profit: providing bank standby credit lines to back companies' short-term debt. The second-largest U.S. bank, which says it arranged almost half of the credit lines backing up the $1.36 trillion market in commercial paper, or corporate IOUs, is discouraging some companies from renewing standby commitments and encouraging them instead to borrow money by selling bonds. "We counsel our clients that the appetite for these types of facilities is challenged right now," Suzanne Hammett, J.P. Morgan's head of credit-risk policy, told analysts and investors at the bank's midtown Manhattan offices Friday. J.P. Morgan, the biggest arranger of corporate loans, is pulling back after Enron Corp. used standby credits to pay back holders of short-term debt just before filing for bankruptcy protection in December. Several other large clients, including Xerox Corp. and Southern California Edison Co., drew down billions of dollars of backup credit after they were unable to sell short- term debt. Providing the credit was once "sort of like writing a warranty and no one ever called you on it," said James McGlynn, who helps manage $5.3 billion at Summit Investment Partners and holds J.P. Morgan shares. "But the margins go from 100 percent to nothing if" companies borrow the money and then don't repay. The bank's move may make it more expensive for companies to obtain backup commitments at a time when General Electric Co. and other borrowers are seeking to ease investor concerns about their creditworthiness. Companies often use credit lines as a type of insurance policy for repaying commercial paper, unsecured debt that matures in nine months or less. Enron Loans In May 2000, Enron obtained a $3 billion credit line from J.P. Morgan, Citigroup Inc. and several other lenders, paying the banks $2.65 million in fees, according to Bloomberg data. That proved costly when the energy trader drew down the $3 billion last October and filed for bankruptcy protection two months later. J.P. Morgan was forced to write off $220 million in Enron loans deemed unrecoverable in the fourth quarter. The bank is among lenders now fighting in court to retrieve the money owned by Enron. As the cost of providing the commitments to back up short- term debt rises, J.P. Morgan is encouraging clients to sell more longer-term bonds. "We are proactively working with our clients to actually access the bond market to reduce dependency on the commercial paper market," Hammett said. Generating Higher Fees Arranging bond sales provides the bank with higher fees and less risk. Banks get paid fees of as much as 0.50 percent of the total amount borrowed for arranging bond sales for top-rated U.S. companies. That compares with fees of 0.10 percent for arranging credit lines. By pushing companies to sell more longer-term bonds, the bank is pushing its clients into a more competitive arena. Even as the biggest arranger of bonds in the first quarter, with $55.1 billion in bonds issued, J.P. Morgan has a market share of about 12 percent. The bank, for instance, is competing with at least 11 other investment banks to win the right to arrange bond sales for American Express Co., the largest U.S. travel agency, according to filings with the U.S. Securities and Exchange Commission. American Express last week lowered its credit commitments arranged by J.P. Morgan to $7.3 billion from $9 billion after announcing plans to reduce its reliance on commercial paper and sell longer-term securities, according to Bloomberg data. The company said in March it plans to sell as much as $8 billion in debt to help reduce its $14 billion of outstanding commercial paper. The majority of J.P. Morgan's clients still are renewing their credit lines in full, spokesman Adam Castellani said. The bank's credit commitments totaled $261 billion at the end of last year. Credit Quality The demand for backup credit commitments grew hand-in-hand with the growth of the commercial paper market since the 1970s. It took on heightened importance in the 1990s as the demand for short- term funds increased with a rise in corporate takeovers. Investors' focus on credit quality in the wake of the Enron bankruptcy has given new urgency to concerns about the adequacy of backup lines. Moody's Investors Service, the No. 2 credit rating company, recently told General Electric it needed more credit to back $100 billion in commercial paper. While some companies have credit lines equivalent to their commercial paper, GE's finance unit, General Electric Capital Corp., had loan commitments backing 33 percent. GE Capital is seeking more than $15 billion from a group led by J.P. Morgan, Citigroup and Bank of America Corp. to bolster its available credit. Increasing Costs J.P. Morgan is so big in the market for credit commitments in part because it is the combination of several banks that had been active in the past -- Chase Manhattan Corp., J.P. Morgan & Co., Chemical Banking Corp. and Manufacturers Hanover Corp. As it pulls back from providing credit lines to back up commercial paper, financing costs for companies could rise. American Express, for instance, agreed to pay an interest rate of 0.23 percentage points more than the London interbank offered rate, or Libor, for a $1.2 billion five-year credit line led by J.P. Morgan last week. That's more than the 0.18 percentage points more than Libor it agreed to pay last year on a $2.2 billion line also led by J.P. Morgan with the same maturity. "This has the effect of increasing the cost of debt capital," said John Lonski, chief economist at Moody's Investors Service. "To some degree, this discourages companies from building up inventories or increasing capital spending."
