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Monday, April 07, 2008 8:55 PM

Tapping Credit Lines To Avoid Default

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Bloomberg is reporting Tribune, Dole May Need to Draw Down Bank Credit Lines.

Tribune Co. and Dole Foods Co. may need to draw down on bank lines to avoid default, causing a new drain on bank capital, according to Morgan Stanley analysts.

The companies currently don't have enough cash and committed credit to cover debt repayments over the next two years and may have to resort to credit lines or "potentially face severe financial difficulty," said Greg Peters, the head of credit strategy at Morgan Stanley in New York.

For lenders including Citigroup Inc. and Merrill Lynch & Co., prospects that the 80 companies with revolving credit lines of more than $1 billion will start drawing them down threatens to further erode balance sheets that have been hammered by losses from securities linked to U.S. home loans. Banks are restricting lending after $232 billion of credit losses and writedowns from subprime-mortgage related debt.

"There's a real game of chicken going on between banks and the corporations as to whether you should tap," Peters said on a conference call for investors today. "This is a very big deal."

Even if Tribune, bought by billionaire investor Sam Zell for $8.1 billion in June, taps its entire $750 million credit line, it still may not be able to pay back $1.85 billion of debt maturing in the next two years, the analysts said. They estimate that the amount of cash, cash equivalents and funding available on the credit line currently falls $664 million short.
I am still shaking my head at Zell Buying the Tribune with extreme leverage. To pay the debt he is scrambling to sell the Chicago Cubs and his 31% stake in the Food Network. Will there be buyers? At a good enough price? Zell clearly knew commercial real estate. Does he know how to run, or even evaluate a newspaper? Perhaps we are about to find out.

M3 Growth and Tapped Credit Lines

I get a kick out of all the people pointing to a rising M3 as some sign of huge existing or huge pent up inflation. It's important to understand why M3 is growing and what it really means. Few bother to look.

Sprint Nextel Corp. borrowed $2.5 billion in February from a $6 billion credit line arranged by JPMorgan and Citigroup. CIT Group Inc., drew down four emergency credit lines totaling $7.3 billion last month after being cut off from customary sources of cash. No doubt some consumers are tapping home equity lines just to make sure they have cash.

Where is everyone parking the cash? The answer is: Money market funds. Bart at Now and Futures writes "11/30/2007 - Note that much of the large growth in M3 lately has been in flows into CDs and Money Market Funds, a normal occurrence during financial turmoil."

Other growth in M3 comes from those cashing out real estate deals and parking that money in cash. Clearly the growth in M3 is not makings its way into the real economy. Businesses are cutting back, consumers are cutting back, state and local governments are cutting back.

Borrowing money just to pay back debts simply means more money (credit actually) is going to money heaven. This is the problem with focusing on a number like M3 without looking at the "why" behind it.

Avoid Default or Delay Default?

Bloomberg noted that Tribune bonds due in 2015 have fallen 3 cents in the past month to 37 cents on the dollar. Those numbers suggest that borrowing more money just to meet short term obligations will be a postponement of default rather than an avoidance of it. I think Sam Zell did one deal too many. Time will tell.

Mike "Mish" Shedlock
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