Thursday 12th March 2020
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Private equity titans Blackstone Group Inc. and Carlyle Group Inc. are sending a directive to portfolio companies: Do whatever it takes to stave off a credit crunch.
The firms are asking some of the companies they control to draw down their bank credit lines to help prevent any liquidity shortfalls amid signs of mounting stress in markets, according to people with knowledge of the matter.
At Blackstone, which has weathered a variety of crises in its 35 years, the discussions focus on sectors impacted by the spread of the coronavirus, such as the hospitality industry, as well as energy firms facing a slump in oil prices, people familiar with its talks said.
Carlyle’s directive isn’t widespread, other people said. The firm has been having broad discussions with management teams at portfolio companies and recommended drawing credit lines in certain instances, according to people familiar with the matter. Decisions are based on industries, regions and other factors, the people said.
The moves -- along with similar plans by Boeing Co., Hilton Worldwide Holdings Inc. and Wynn Resorts Ltd. -- are signs of the uncertainty coursing through corporate America as a global pandemic and a price war in oil markets threaten to tip the U.S. economy into a recession. A sudden and sustained increase in companies tapping credit lines could eventually strain banks if conditions become so dire that borrowers won’t be able to meet their obligations.
Lenders offer revolving credit lines to strengthen relationships with companies and don’t typically intend for them to be drawn upon en masse. In normal times, revolvers serve as the corporate equivalent of credit cards, giving companies room to borrow as needed and repay when shortfalls ease. Under normal circumstances, the lines are seldom maxed out. Extensive use can be seen as a harbinger of distress.
Oil and natural gas companies can come under particular funding stress when prices fall. That’s because their credit lines are periodically updated based on market prices, potentially motivating companies to tap them early.
Blackstone’s private equity operation is the firm’s largest business by assets, at $183 billion. Energy accounts for almost 10% of the total portfolio, the New York-based company said in October. Rival private equity firms also are weighing similar actions, according to executives at two of them.
“From an economic perspective, the virus has created dislocation in the market and fear among the people,” Blackstone co-founder Stephen Schwarzman said in an interview in Mumbai last week. “Once that starts, one has to find the impact of negative consequences.”
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