Some corporate treasurers are ramping up their contingency plans to anticipate any upcoming funding and liquidity needs to avoid the risk of a debt freeze as Washington talks drag on, financial executives and advisers said.
With the U.S. Treasury Department warning that the federal government may run out of money to pay all its bills as early as June 1, some companies are planning their bond issues and trying to secure enough liquidity in advance in case the market defaults.
“It’s better not to hit the capital markets around the debt ceiling given the uncertainty,” said Alvaro Ortega, vice president of finance at Avangrid, a renewable energy company based in Orange, Connecticut.
Ortega said Avangrid has about 13 months of liquidity to run its business, and communications with the company’s banks are ongoing. Ortega did not name the banks his company does business with.
Avangrid has a committed revolving credit facility that provides access to liquidity at any time. It uses this type of credit to back its commercial paper, an unsecured promissory note that pays a fixed interest rate, which can be used to fund short-term obligations such as investments, operating expenses and wages.
With little time left to avert the risk of default, President Joe Biden and Republican chief executive Kevin McCarthy appeared to reach an agreement on Thursday to cut spending and raise the debt ceiling.
Amol Dhargalkar, global head of corporates at Chatham Financial, also said he sees contingency plans across the board among the firm’s clients.
Companies think it’s “fine to make issues this week”, but avoid an issue in the first week of June.
“Companies don’t want to do it and banks don’t want to guarantee deals either, because investors may not fund those deals,” Dhargalkar said.
Avangrid’s Ortega said his banks have circulated a calendar of when debt issues should be avoided.
“We know that there will be uncertainties around the debt ceiling on those specific dates. So, for example, they advise not to issue bonds on those dates,” Ortega said.
Chris King, a co-founder at Dukes & King, a corporate finance and risk management firm, said at least one of his corporate clients has begun refinancing as “a general de-risking.”
King added that with the heightened economic risk, proactively assessing overall exposure and risk “ensures you are well positioned for any imminent downturn.”
Chatham’s Dhargalkar said even a minor inconvenience around the debt ceiling could be significant for companies, leading to dramatic changes to their financing plan and costly delays.
Many companies that have waited to issue bonds this year have decided to issue in May amid fears of greater price volatility from June to September should the deadlock around the debt ceiling continue, market participants said.
According to Yuri Seliger, head of credit strategy at BofA, he expects issuance volume to reach $140 billion in May, a significant increase year-to-date and nearly double the $85 billion issued in May last year.
According to a banker who works on debt syndications, his team is avoiding syndicate deals next week due to expected market volatility and the holiday holidays during Memorial Day week. The bank and borrowers plan to re-examine the market the week after June 5, the banker said.
“If this continues, there could be a lot more volatility to come,” said Natalie Trevithick, head of investment grade credit strategy at asset manager Payden & Rygdel.
“There is so much uncertainty from early June to September, so it seems logical for the issuer to remove that uncertainty by issuing now,” she said. (Reporting by Laura Matthews; additional reporting by Matt Tracy; editing by Megan Davies)
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